More to Come

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On Monday the S&P 500 fell by less than 0.1%. This modest setback was enough to break a four-day winning streak and probably reflected the fact that breadth was negative by a 6:5 ratio.

That said, volume was positive by a 7:4 ratio. This continues a rather consistent characteristic of this rally – volume has generally been constructive (even on “down” days). A change in this behavior could be an early warning of a reversal.

Yesterday afternoon’s decline probably marked the end of the first leg of a larger rally that began on August 17. We say that because we can easily count a five-wave pattern on the hourly chart and momentum on that same chart appears to have clearly reversed to the downside. A decline on Tuesday through the 1023-1022 area would help confirm a complete pattern from the low on the 17th.

S&P 500 Hourly

That five-wave rally from August 17 should prove to be the first leg of a larger pattern. We say that because the internals (breadth, volume, momentum, and sentiment) are not at levels that typically accompany a top. Indeed, there are more “good” overbought readings than not. In addition, the Fibonacci relationships are not indicative of a top.

All and all, any follow-through from yesterday afternoon’s pullback should hold at or above 1014-1000. However, it will take a full blown decline through 979-978 to suggest that something more serious is afoot. The July low itself at 869 is still viewed as tactical support.

Chart and Fibonacci resistance in the 1007-1048 range has proven itself within recent weeks. However, we expect that a continuation (a third wave?) of the rally from August 17 will breakout through this range. A rally from last Monday’s low would be 61.8% of the prior July-August uptrend at 1070; equality would imply 1127 (which is also a 50% retrace of the entire 2007-2009 decline).