1053 or Bust v2.0

Editors Note: As most readers of this blog are aware, it has been our intention to move to a subscription service in the early autumn. Over the past 24 hours, we have emailed those on our distribution lists detailing our offerings and the associated prices. If you did not receive that e-mail or are not on our lists, and would like to receive a copy, please send an email to wmgallc@gmail.com.

On Wednesday, the S&P 500 rallied 1.0%. That was its fifth straight gain; one has to go back to June 2007 to find a longer streak (and back to last November to find one as long). The breadth ratio was positive by more than 3:1. The up/down volume ratio, at almost 5:1, was even better and total volume expanded by 6.6%. The biggest bug-a-boo is that a majority of the 24 S&P industry groups have not outperformed the “500” in the past three sessions.

The S&P rallied to as high as 1044 on Thursday, which is well within the 1039(40)-1053 range mentioned in Wednesday’s post. This, plus the fact that the index is on a relatively uncommon five-day winning streak, suggests that the “500” could be on the verge of completing a diagonal triangle (aka a “rising wedge”) that has been in force since the July low. Diagonals are ending patterns, so this count implies that the rally from the July low could be the final leg (“C” wave) of a(n) (ABC) bear market rally from the March low.

Thus, all hands are on deck for a potentially important reversal. And, indeed, there are a number of divergences. For example, momentum peaked weeks (if not months) ago, the P&F Bullish Percent indicator has yet to exceed August’s high on any of S&P’s four major indexes (the 500, 400, 600, and 1500), and almost 200 of the stocks in the “500” are at least 5% below their respective ytd highs even as the “500 is at its own new high.

That said, AAII reported its fourth consecutive weekly survey where bears were equal to or greater than bulls. Moreover, we can make a case that the 22-week cycle still has a bullish bias. This allows for higher rally highs, or at least a limited decline.

S&P 500
With that in mind, a rally through 1053 would invalidate the wedge. Indeed, such a penetration (especially if it carries through 1058) would open the door for a challenge of 1120-1160. That range encompasses both a 50% retrace of the post-2007 bear market and the point at which the rally from the July low equals the March-June rally.

The uptrends from both the March low and the July low are still intact, but a decline through increasingly important first support at 980-970 would help lock in the rally from July’s low as a complete pattern and would put pressure on the post-March trend line. Below 980-970, support is indicated in the 954-934 range.