Running Out of Time

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Wednesday was an outside day. The S&P 500 rallied to a new recovery high before declining sharply in the final hour to penetrate the prior day’s low and finish with a loss of 0.9%. This was the first time in more than two weeks that it recorded back-to-back losses. Breadth was negative by a bit less than 3:1, and the up/down ratio was negative by a 13:5 margin. Total volume increased by 5%. Like Tuesday, Wednesday was a distribution day.

Despite the weakness of the past two days, which resulted in a second degree lower low for the first time since the rally from the October 2 low began, we are not quite ready to give up on the idea of higher highs. As mentioned yesterday, this rally is skating on thin ice. Both near and medium term momentum indicators are under pressure, sentiment is showing excessively bullish readings, and the 22-week cycle is peaking. (Other than that, everything looks fine!)

The decline has yet to lock in the rally from the October 2 low as a complete pattern. We have said that our focus is on 1067-1066. That is still our focus; a break of that level in coming days would be enough to lock in the rally as a complete corrective rally pattern. Such a development, combined with the momentum, sentiment and cycle pressures would not bode well for the market in the weeks ahead. A decline through 992-991 will lock in the larger July-September rally as a complete Elliott Wave pattern. The July low (869) continues to be tactical support.

The post-March uptrend is still intact (the uptrend line is just above 1048). The recent highs at 1097-1101 is now first resistance. Although the door is still open for a challenge of 1121-1156, it appears to be closing.

Meanwhile, oil rallied to 81 yesterday, which is at the upper end of the 79-81 range that we mentioned in past comments. Near term momentum is overbought, medium term momentum has been weak, and the price pattern is extended. Whether the recent strength proves to be a third wave remains to be seen, but these conditions suggest that a meaningful pullback could occur at any time. Nearby support is 79-78, then the 75 breakout area. Beyond 82-83, we might have to look for a challenge of the low 90s.