If It’s Obvious, …

On Monday the S&P 500 fell 0.8%. The decline was significantly deeper in early trading, but a recovery – particularly in the final 30 minutes – helped pare the losses. Even so, breadth was negative by almost 5:1 and the up/down volume ratio was negative by more than 4:1. However, none of this erases the fact that the index gained 3.4% for all of August (which was the best August in nine years).

Is more weakness likely? Probably, but a significant decline from these levels seems unlikely. That said, we continue to believe that the uptrend from the March lows is a bear market rally and “stuff” will hit the fan in due course. But at present, there is a significant amount of bearish commentary (e.g., “Stocks in US Extend Worldwide Drop on Speculation Rally Has Gone Too Far” or “The Rally is Over”). Moreover, some of the better sentiment surveys (at least in our view) show more bears than bulls. In the words of Joe Granville, “If it’s obvious, it’s obviously wrong.”

A few days ago, we suggested that the S&P might be forming a triangle/wedge (from August 24). That remains a possibility, as does a “flat.” Both are continuation patterns, which would allow for another rally to new recovery highs. Moreover, intermediate momentum still has the potential to maintain a bullish bias into the end of September. And the trusty pencil and ruler suggest that the uptrend is still nicely intact. So, despite the protestations to the contrary, we are inclined to give the rally some leeway.

S&P 500 with Primary Post-March Trend Line
That said, a decline through 980-970 would make us nervous. Such a decline would violate both the August 18 reaction low and the uptrend line from the March lows. Our nervousness would increase if such a decline was a five-wave Elliott Wave pattern.

For now we will continue to use 1015(6)-1001 as first support, with the aforementioned 980-970 range viewed as second support. The July low itself at 869 is still viewed as tactical support.

Chart and Fibonacci resistance is indicated at 1037-1058, 1070-1081, and 1117-1127.