A Fourth Wave Pre-Holiday Rally?

Editor’s Note: September’s Monthly Insights has been released. If all goes well, this will be the final monthly report before we move to a subscription service. If you did not receive a copy and think you should have, or if you would like to be put on a list as a potential charter subscriber, send an e-mail to wmgallc@gmail.com. An e-mail with subscription details will be sent out in the next week or so.

On Thursday the S&P 500 gained 0.9% and broke a four day losing streak. Breadth was positive by a 4:1 ratio and the up/down volume ratio was positive by a 7:1 margin. However, total volume fell by 20% from Wednesday’s level, suggesting that there was an early get away before the long Labor Day weekend.

Hourly momentum has turned up, but daily momentum is overbought and deteriorating. This combination raises the possibility that yesterday’s rally was a fourth wave from the August 28 high. If so, we will need to be alert for a fifth wave decline. If such a decline develops – and especially if it breaks below 980-970 – the prospects would be for lower lows in the days and weeks ahead.

S&P 500

That said, if the S&P rallies much beyond 1010 – and especially if it pierces 1028-1029 – without first breaking below 992, then the potential for an impulsive decline will be weakened if not eliminated.

While the uptrends from both the March low and the July low are still intact, a decline through 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. A break of tactical support at July’s 869 low would confirm a complete post-March pattern. Between 980-970 and 869 there is potentially strong intervening support in the 954-934 range.

The recent high was important from a Fibonacci perspective. This was reflected in our original 1007-1048 range but in the days ahead we will use 1015-1040 as our focal point.