New Highs Will Not Mean “All Clear”

On Tuesday, the S&P 500 rallied 0.7%. The 11:5 positive breadth ratio almost reversed Monday’s 5:2 negative ratio. However, the 7:2 positive up/down volume ratio swamped the prior day’s 6:5 negative margin and the cumulative up-down OBV line recorded a new recovery high. In the sense that volume often leads price, these last two points are a sign that the underlying post-March ratio still has some life in it. Indeed, the uptrend lines from both the March low and the July low remain unchallenged.

The rally from yesterday’s low has an impulsive look to it and has locked in the September 17-21 decline as a corrective pattern. As a result, our inclination is to count the rally from yesterday’s low as the fifth wave of the rally from the September 2 low. In turn, the rally from September 2 would be the third wave from the mid August low. If this is correct, then a coming pullback should be a fairly well-contained fourth wave in preparation for a larger degree fifth wave run to yet another recovery high.

That said, such a recovery high could well mark the final leg of the pattern from not only the mid August low, but also from at least the July low. Thus, there is a case to be made that the Elliott Wave risk for an important top is growing. In addition, the weekly Coppock Curve for the S&P 500 has not confirmed the recent strength and is positioned to turn down again by mid October. If it does, it will likely have a bearish bias through the balance of the year. Moreover, the Bullish Percent Index is at its third highest reading in the history of our 12-year data base and is at levels last seen in early 2004 just before a multi-month correction. Finally, the rally from the July low is in its 11th week, suggesting that the 22-week cycle will be increasingly at risk of a top in the weeks immediately ahead.

S&P 500 with Current (and Projected) Weekly Coppock Curve
All and all, it is not much of a stretch to suggest that, even allowing for a higher high, it does not get much better than this. Thus, any such higher high is likely to be an ending, not an “all clear” signal.

A fourth quarter correction will likely be a Fibonacci retrace of – at worst – the post-March rally and it may only be a Fibonacci retracement of the post-July gain. To put that into perspective, a 38.2% retracement of the post-March uptrend would imply a 15% decline.

First support remain is at 1035; a breach of that level would confirm the end of the rally from the September low. A break of second support at 992-991 would be the first lower low on the weekly chart since the July low. The July low (869) continues to be is tactical support.

On an arithmetic scale a 50% retracement of the decline from the 2007 high to the 2009 low implies a challenge of 1121. Meanwhile, 1159 is the point at which the post-July rally will equal the March-June uptrend. Chart resistance (from the September 2009 reaction low is apparent in the 1155-1156 area. Thus, the 1121-1156 range is a potentially significant range.