Staying the Course

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.

The S&P 500 gained 2.5% on Monday. That was its best gain since June 1, supported by solid breadth and volume ratios. However, Monday was not a 9:1 day and, while total volume increased over Friday’s level, it remains below the declining 21-dma.

Most near term momentum oscillators are oversold after failing to make any meaningful progress from their previous oversold condition. This suggests that they may be better positioned to support a rally this time. In addition – and as mentioned in the recently released monthly Insights – sentiment is also generally neutral to oversold. All of this suggests that the near term environment could be constructive through the rest of the month.

That said, a rally through 932 would lock in the decline from the June 11 as a corrective pattern. If that were to happen, we would be alert for further strength to or through those June highs (at 956).

However, medium term momentum will likely withstand any near term strength and we think it reasonably likely that the 22-week cycle will also withstand a near term rally. So, new recovery highs would merely serve to generate more negative divergences than those that already exist.

As a result, we are inclined to stay the course and suggest that near term strength is likely most suitable for more aggressive traders. The current evidence suggests that the medium term pressures are likely to persist. Surprises should be to the downside.

The 879-866 range remains tactical support. If breached, the door would be open for further weakness toward at least 812-777.

A rally through 904 would increase the probability that the decline from the June 11 high as a corrective pattern. As mentioned, a violation of 932 would seal the deal. Beyond that we would look of June’s 956 high.