A Wedge No More

Editors Note: We have completed the distribution process for our latest Short Term Review. If you do not receive a copy please e-mail wmgallc@gmail.com to request one. On another note, the design process for our new website is well along and it looks like we may be able to roll out a static version by the end of the month. The interactive version may require a couple of additional weeks.

On Tuesday, the S&P 500 rallied 0.3%. This was its seventh gain in eight days and was supported by solid breadth and up/down volume ratios, as well as a 27% increase in total volume.

Those constructive statistics are all well and good, but the most important part of Tuesday’s rally was that the S&P broke above 1053. As a result, the potential diagonal triangle (aka a rising wedge) that we have been tracking from the July low has been invalidated. This development has at least three consequences in our view. It suggests higher highs; indeed, we need to be alert for a possible third wave acceleration. In turn, the prospects for a 50% retracement of the 2007-2009 bear market have improved. Finally, the breakout buttresses the view expressed in our new Short Term Review that, while the post-March “bull market” is really a bear market rally, a second bear market to new lows appears unlikely at this time.

All that said, the market is overbought. So a correction is due – even overdue. But the expectation is that such a correction will be a Fibonacci retrace of – at worst – the post-March rally; it may only be a Fibonacci retracement of the post-July gain. With that in mind, a violation of the post-March uptrend, which is currently at 983, would argue for the larger correction.

One final reminder before we discuss support and resistance. We have consistently said that the 2007-2009 decline is NOT impulsive. That is still our view.

First support is indicated at 992-991. A break of that level over the next three days would be the first lower low on the weekly chart since the July low. The July low (869) is tactical support and is likely to remain so for some time.

S&P 500 with 2007-2009 Retracement Levels

On an arithmetic scale a 50% retracement of the decline from the 2007 high to the 2009 low implies a challenge of 1121. Meanwhile, 1048 is the point at which the post-July rally was 61.8% of the March-June uptrend. Since the breach of 1053 implies higher highs, we respect the potential for further strength toward equality at 1159. Chart resistance (from the September 2009 (Lehman Brothers) reaction low is apparent in the 1155-1156 area. Thus, the 1121-1159 range has become significant.