Structure Versus Strength

On Monday, a last hour spurt allowed the S&P 500 to finish with a solid 1.1% gain. As a result, the index has now rallied over 8% since the July 8 low. (As good as that is, it is half of the 16.2% eight day surge off of the March low.) Breadth was solidly positive and our common stock a-d line has broken out through its June high (that’s a good thing). The up/down volume ratio was also solidly positive, but total volume declined for the fifth time during this eight-day rally (that’s not a good thing).

It is possible – even straight forward – to count five waves up on a weekly chart of the S&P. However, when one looks under the surface at a daily or hourly chart it is, in our opinion, impossible to maintain an impulsive structure. This is why we have referred to this post-March rally as a bear market rally. And this is why we chose today’s title. That is a title we used several times during the 2002-2007 “bull market.” We maintained through most of that run that it was a bear market rally (which is why we always put quotes around the term “bull market) and repeatedly suggested that when it was over, it would be substantially, if not fully, retraced. We cautioned readers to be careful. The same thing is going on now, though probably to a smaller degree, and we have been offering the same words of caution.

S&P 500

That said, there appears to be some important considerations. First, while the S&P has locked in the 2007-2009 decline as a complete pattern, the DJIA has yet to do so. However, a rally by the DJIA though 8878 will eliminate that discrepancy. Second, the S&P has retraced more than 38.2% of the 2007-2009 decline. Thus, the door is open for a 50% retracement (to 1026). Finally, the March-May “A” wave was quite complex; alternation suggests that the current “C” wave will be straight-forward.

With all that in mind, higher highs seem likely. Not only is the current (potentially simple) “C” wave unfinished, but near term momentum is still constructive and likely to maintain this bullish bias into the end of the month. Moreover, sentiment is not terrible. Thus, we repeat our recent observations that, beyond 956, the next objective is arguably at indicated chart and Fibonacci resistance in the 1007-1048 range.

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.