Nothing Wrong With That One

Editor’s Note: The monthly Insights was released over the weekend. For those not on the distribution list and wishing to receive a copy, please send an e-mail request to wmgallc@gmail.com.

On Wednesday, the S&P 500 had its best day since mid May with a rally of 3.0%. Moreover, that gain was supported by a 29% increase in total volume, breadth and volume ratios generated a 9:1 up day, the downtrend line from the June 11 high was violated, and resistance at 932 was breached. So, in a sense, there was nothing wrong with Wednesday’s performance. Indeed, that performance portends higher rally highs.

In previous posts we have made the case that near term momentum had the potential to maintain its bullish bias into the end of July and that a rally through 932 would lock in the June-July decline as a corrective pattern and open the door for further strength to or through 956. That is the position we are in now. In addition, the strength since Tuesday afternoon appears to have been an Elliott Wave “third of a third.” This is more reason to look for higher highs.

Still, the intermediate background is a concern. We have mentioned that intermediate momentum is likely to have a bearish tone into late September and that the 22-week cycle remains down. The nearby chart shows the relationship between the two. Given that this rally is starting from an overbought condition, we question its staying power.

S&P 500 with 22-Week Cycle Lows and Weekly Coppock Curve

Beyond 956, there is chart and Fibonacci resistance in the 1007-1048 range. At the same time, the recent strength has not changed our view that the 879-866 range is tactical support; if it is violated, we would be inclined to look for further weakness toward at least 812-777.

Before we go we have a quick comment on 10-year yields, which rallied sharply Wednesday. It is possible to count the rally of recent days as an Elliott Wave fifth wave. If that proves to be true, it would likely have negative implications for the health of the 28-year secular downtrend. Of more immediate interest, 10-year yields have been paying close attention to an uptrend line since December. Indeed, there have been as many as seven “touches.” Clearly, a violation of that trend line would represent an important change, regardless of the “count.”

10-Year Yields with Dominant Uptrend Line