Skating on Thin Ice

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On Tuesday, the S&P 500 fell 0.6%. Breadth was negative by a bit less than 4:1, and the up/down volume ratio was negative by a 10:3 margin. Total volume increased by 17%. All of this suggests that Tuesday was a distribution day.

In recent comments we have laid out evidence suggesting that the rally from the October 2 low was subdividing, allowing for still higher highs. Indeed, in yesterday’s post we allowed as how the S&P could still be within the third wave of a larger five wave structure. Tuesday’s decline weakened that possibility, but did not eliminate it. It will take a decline through Friday’s low (1081.53) to complete a five wave pattern, but it will require a violation of 1067-1066 to lock in the rally from October 2 as a complete pattern. In “Plain English” this means that, while the potential for higher highs may not be robust, it still exists.

S&P 500 with Near and Medium Term Momentum
Meanwhile, near term momentum is headed toward a downside reversal. The daily Coppock Curve is positioned to peak over the next 3-5 days for both the S&P and a majority of the 24 industry groups. Moreover, the 22-week cycle is peaking. So while the Elliott Wave pattern allows for an extension to higher highs, the non-Elliott evidence suggests that the current rally is running out of time.

The post-March uptrend is still intact (the uptrend line is just below 1046). This, plus the fact that momentum is still positive keeps the door open for a challenge of 1121-1156.

That said, first support is still indicated at 1082-1081, but our focus will be on 1067-1066. A break of that level, combined with the momentum condition, would not bode well. 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.