Stocks, Bonds, and Oil: What a Wednesday

On Wednesday, the S&P 500 gained 1.8%, which was its best performance of the month to date. Advancing issues outpaced decliners by better than 6:1 and the up/down volume ratio was positive by a 15:2 margin. Total volume increased by more than 20% for the second consecutive day and edged just above its 21-dma.

Our media friends were all agog at the fact that the DJIA cracked 10,000. From our perspective, the S&P’s rally decisively through 1080 was more important. Indeed, while that was something we had been waiting for, we may have underestimated its importance. This is because each of the three uplegs since the August 17 low can be counted as five-wave patterns, but the current rally from the October 2 low still only has three waves. As a result, we may still have to wait for a fourth wave pullback and a fifth wave to another new high. For some time, we have suggested that a rally through 1080 would open the door for further strength to 1121-1156. That now appears to be a more reasonable possibility.

S&P with Bullish Percentage Index

That said, we still need to respect the idea that today’s action is more of an ending than a beginning. Indeed (and as indicated yesterday), the overall action is reminiscent of the period just prior to the June-July correction. The uptrend line from the March low is currently near 1034, but first chart support is now indicated at 1065-1058; second support remains 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.

While most of the attention was on stocks, the nearby contract for the long bond fell to as low as 119:04 on Wednesday – and achieved that low on five waves from the October 2 peak. In addition, some (not all) important uptrend lines have been breached, the daily Coppock is weak, and the weekly Coppock is peaking. All of this suggests that a new downtrend is just beginning. The post-June uptrend line is near 118:16, which is just above nearby chart support. Tactical support is at 114:25. Nearby resistance is at 121:08, then 123:25.

And to top it all off, oil finally rallied through 75. Though it was a marginal breach, it was what can be called a “triple top breakout” or even a “quadruple top breakout” in point and figure parlance. That is important because it was the P&F chart that alerted us to the idea that the recent breakdown to 66-65 was a bear trap. Now, Wednesday’s breakout paves the way for higher P&F objectives; traditional P&F charts suggest the 94 area, but we will focus first on 79-81. Prior resistance at 71-75 is now support.

Oil