Last Gasp Pending

On Tuesday, the S&P 500 fell 0.3%, which broke a six-day winning streak (the longest in over five years). Breadth was negative by a 7:4 margin, while the up/down volume ratio was negative by 4:3. Total volume increased by 20% over Monday’s semi-holiday level, but remained below its 21-dma.

In recent posts, we have made the case that, while there are a number of negative indicators of time, intermediate momentum, and sentiment to consider, the S&P seemed to have some unfinished business. From an Elliott Wave perspective, another new recovery high above September’s 1080.15 benchmark still seemed needed in order to complete a more proper or correct pattern. The rally of the past six days fell just short with a peak of 1079.46. However, both the daily Coppock Curve and the Bullish Percentage Index (BPI) for the S&P 500 suggest that the door is still open for another challenge of 1080. The Coppock has turned up and has the potential to maintain a bullish bias for 7-9 days. Similarly, while the BPI is overbought in absolute terms, its daily stochastic indicator is coming up off of an oversold condition; this is reminiscent of the action just prior to the June-July correction.

Bullish Percentage Index for the S&P 500
If these conditions do lead to a rally, such a move would not be an “all clear.” Rather, we would view it as a last gasp that would serve to satisfy the minimum requirements for a complete bear market rally pattern from at least the August 17 low and probably the July 8 low. We would also have to respect the possibility that the entire post-March rally was drawing to a close. All of this implies that, even allowing for another recovery high, the S&P 500 is on the verge of its largest correction since at least the May-June 2009 pullback and perhaps since the January-March 2009 decline.

The S&P has been probing first resistance at 1070-1080. While a rally through that range may not carry all that far, the door would nominally be open for a challenge of second resistance at 1121-1156.

As of now, the uptrend from the March low is still intact (the uptrend line is currently near 1031). First support is indicated at 1057-1051; second support is at 1020-1015. A decline through 992-991 will lock in the July-September rally as a complete Elliott Wave pattern. The July low (869) continues to be tactical support.