Do You Feel Lucky?

Editor’s note: It has come to our attention that, in the August 7 post where we announced the release of our monthly Insights, there was a typo in the e-mail address. So, if you requested a copy and did not receive one, that’s probably why. Try again at wmgallc@gmail.com and we will send out a copy ASAP.

On Tuesday, the S&P 500 fell 1.3%. That was its fourth decline in five days and the largest since before the July 8 tactical low. Both breadth and up/down volume were negative by about a 4:1 ratio. Finally, it is worth noting that near term momentum is deteriorating for 23 of the 24 S&P industry groups – but 22 of those are still on the overbought side of neutral. (The “bullish” exception is the overbought bank group.)

Monday, we raised first (trading) support to 990.22. On Tuesday, the S&P traded to as low as 992.40. That’s close, but no cigar. Our rationale for raising support was that a breach of that level would lock in the rally from the July low as a complete pattern on our weekly chart. And that is where it gets interesting.

A violation of that support level would also do much to lock in a corrective pattern on the daily chart. So, all of a sudden, the potential for a significant reversal would increase. This potential would be bolstered by the idea that the current near term momentum pressures are positioned to dominate through the balance of the month and put added pressure on medium term momentum (which still has the potential to remain weak through the quarter).

S&P 500
So let’s put this in perspective. The S&P has retraced almost exactly 38.2% of the 2007-2009 decline bear market. What if the rally is not finished and the S&P moves to a 50% retrace? Then we’ll see 1121. What if it retraces 61.8%? Then we’ll see 1229. But what if we are correct and this “new bull market” is really a bear market rally? Then this post-March uptrend will be followed by a decline to something below 667 in the months ahead. So, if we allow for the best case rally scenario, the potential is for a bit more than 200 S&P points from here. Again – that’s the probable best case. On the other hand, we view a coming test of 667 as a probable minimum expectation. Thus, from current levels, the downside risk already outweighs the upside potential by a significant margin. And that is comparing an unlikely best case upside scenario to a very likely downside potential. Now is not the time to become overly bullish.

To repeat: a violation of 990.22 would do much to lock in the rally from the July 8 low as a complete pattern. That said, the July low itself at 869 is still viewed as tactical support.

Meanwhile, unless and until 990.22 is breached, the door remains nominally open for a deeper probe of chart and Fibonacci resistance in the 1007-1048 range.