Oil Spill

Editor’s note: A new Short Term Review has been e-mailed to our regular list. If you did not receive it, or are not on the list and would like a copy, please e-mail us at wmgallc@gmail.com. Our new subscription service is still several weeks away; please send inquiries to the same e-mail address.

On Thursday, the S&P 500 fell 1.0%. It was the first time since September 2 that the index posted consecutive losses. Breadth was negative by more than a 6:1 margin. However, volume declined by a marginal amount. All and all, this was very much in line with the downside follow through discussed in yesterday’s blog.

The sell-off allowed the index to tickle the upper reaches of first support at 1048-1038. Second support is at 992-991; a break of this range 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.

Oil
Today we are giving the S&P short shrift in order to devote some space to oil, which fell 4.5%. This was its biggest decline in two months. Moreover, it broke down from an important top formation, reversed the uptrend from the July low, and violated the dominant P&F uptrend line that had been in force since April. As outlined in the STR, momentum is deteriorating and is in position to remain weak for most of the rest of the year. This, plus numerous unsuccessful tests of primary resistance in the 71-75 area, suggests that the breach of 67-66 signals a key reversal.

The P&F chart projects to 62, there is chart support at 64-62, and Fibonacci support (a 61.8% retrace of the post-July uptrend) at 65. So it seems safe to say that, despite today’s breakdown, there is still a good deal of support relatively close at hand. That said, if the 65-62 range is violated, the door would be open for a full test of the July low below 60 and, in turn, a confirmed reversal of the entire bear market rally pattern from last December’s benchmark low.

Resistance begins at 68-69 and is particularly strong in the 71-72 area.