Nastier and Nastier

Editor’s Note: Depending on the sun, the fishing, and the relatives on Cape Cod these blogs may be a little sporadic, but we will endeavor to keep a pretty regular pace.

On Tuesday, the S&P 500 lost 2.0%. (Interestingly, it is on an eight-day string of alternating gains and losses.) Breadth was poor, as was the up to down volume ratio. Indeed, our 45-month old accumulation model hit a record low. Near term momentum recorded a small – certainly not decisive – downtick.

In yesterday’s comment we described Monday’s action as “nasty.” Tuesday may have been nastier. For some time, we have referred to 879-866 as tactical support. A case can be made that a similarly important point for the DJIA is as low as 8221. If so, that level has been breached. From an Elliott Wave perspective, this confirms the importance of the five-wave June decline and, in turn, seemingly resolved the Elliott conundrum between the DJIA and S&P (which we have discussed several times) in favor of the DJIA. From a non-Elliott perspective, the breach of 8221 may have completed a head-and-shoulders top formation. All of this is, of course, is in conjunction with a poor intermediate momentum background and a bearish 22-week cycle. So, “surprises” are likely to be to the downside in coming weeks.

Dow Jones Industrial Average

That said, the S&P is still hanging on to its tactical support range and near term momentum is still nominally hanging in there (perhaps by the hair on their chinny chin chins). Moreover, the post-June decline for the S&P is much more corrective than that for the DJIA. Thus, we still need to allow for a bear market rally challenge of the June highs. But as we have repeatedly said, such a rally is for aggressive traders. Most, however, need to be on the defensive. They need to be careful.

The 935-936 area remains first resistance with second resistance indicated at June’s 956 rally high. Further weakness through tactical support at 879-866 would open the door for further weakness toward at least 812-777.