Pressures Building

Editor’s Note: Our new website is expected to be fully operational by the first week in November. Until then, we will continue to provide detailed posts and will endeavor to include more comments on bonds/yields, the dollar, and commodities. We will also keep you appraised of any developments related to the website and/or to our publication schedule. Once the website is ready, our monthly Insights, the Short Term Review, and our blog comments will only be available to subscribers on the website. (We will keep our current blog page, but will change to a summary format.) If you are interested in being added to our growing list of charter subscribers, or would like more information, please send an e-mail to WMGALLC@gmail.com.

In yesterday’s post we suggested that, given the underlying momentum, sentiment, and cycle background, the potential existed for a deeper – even full – retracement of October’s rally. To that array we can add the Bullish Percentage Index (BPI). In the glossary in our new website we describe the BPI as “a breadth/momentum indicator that is most commonly calculated by dividing the number of stocks that are trading on a Point and Figure (P&F) buy signal by the total number of stocks within the group being analyzed.” In that sense it is very much an unweighted measure of an index’s health.

BPI for the S&P 1500

The nearby chart is the BPI of the broad-based S&P 1500. So, it can be thought of as a measure of the market’s health. With that in mind, it should be noted that the BPI is breaking both its uptrend line from the March low and a support line that has contained a top formation that has been evident since July. This combination, plus the fact that we expect the BPI to carry to at least the 50%-30% area during a coming correction, suggests that the market may only be in the very early stages of a decline. Thus, this could – even should – be the most important pullback since June-July and perhaps since January-March.

Yesterday we suggested that while we could expect at least 50%-61.8% retrace of the S&P’s October rally (to test of 1061-1051), our focus will be on 1020. The index is already in the upper reaches of first support and, as this is written, the market is about to open and further weakness is indicated. On top of all of this, the S&P’s uptrend line from the March low is in the 1058 area.

Nonetheless, the rally pattern from the July low will remain intact as long as the index holds above 1020.

Yesterday we thought that this decline from the 1101 high appeared to be corrective. We are not so sure of that today. Even so, we still believe that this weakness will ultimately prove to be a correction within, but not a reversal of, the post-March structure.