Lower Lows

Editor’s Note: September’s Monthly Insights was sent out last night to our primary distribution lists. 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 Wednesday the S&P 500 recorded its fourth straight loss with a decline of 0.3%. Breadth and volume ratios were negative but by less than a 2:1 margin. This is quite moderate, especially when compared to Tuesday’s 9:1 down day.

The decline from the hourly high on the 27th has an impulsive look to it, and near term momentum has turned down for a majority of the 24 S&P industry groups. Moreover, the P&F Bullish Percentage indicator for both the S&P 1500 and the NDX has crossed below its 21-dma. All of this suggests that lower reaction lows are likely.

NDX Bullish Percentage Indicator with 21-dma

That said, the aforementioned momentum pressures are expected to persist into mid September, which is about the same time that a 10-week cycle low will be anticipated. While this suggests a general period of malaise over the course of the next 2-3 weeks, sentiment levels are not at excessively bullish levels. Indeed, our reading of the sentiment indicators suggests that there is a fairly large amount of skepticism by historical standards; this could help limit the downside potential.

Nonetheless, this is not a time for rose-colored glasses. The bear market rally from the March low retraced 38.2% of the 2007-2009 decline on arithmetic scale and 50% of that same decline on log scale. So a case can be made that that the S&P has done what it needed to do in order to correct the bear market.

In recent posts we said that a decline through 980-970 would make us nervous. At this point, however, all but the shortest of trends within the post-March structure are still up. The uptrend from the mid August reaction low at 979 has been reversed, but the uptrends from both the March low and the July low are still intact. However, a decline through 980-970 would help lock in a complete pattern from July’s low 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. (That said, a test of the mid August low at 979-978 benchmark would represent an approximate 38.2% retrace of the rally from July’s low. Thus, a break of that range would imply further weakness to the 954-934 range, which encompasses a 50%-61.8% retracement of the entire July-August rally. This range could provide important intervening support.)

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.