Waterloo?

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The S&P 500 rallied 2.3% on Thursday. This was its best performance since July 23 and broke a four-day losing streak. Both breadth and the up/down volume ratio were positive by an 8:1 margin. The daily Coppock Curve still has a bearish bias for 22 of the 24 S&P industry groups.

Though some analysts believe that the bears have met their “Waterloo,” it remains to be seen just how important today’s rally is in the overall scheme of things. We believe yesterday’s decline was more important.

Many attribute Thursday’s rally to the solid GDP numbers. But that ignores the fact that the stock market is a leading indicator. In fact, a case can be made that March’s low was in anticipation of today’s numbers. From that perspective, Thursday’s rally is merely reaction to an oversold condition that may well have happened even if there were no “news.”

S&P 500 with Daily Coppock Curve

Thus, we are inclined to consider the rally is normal. In fact, it can be considered a fourth wave in a larger five wave decline. In Elliott Wave, a fourth wave typically does not retrace much more than 50% of the previous third wave and often goes back to the previous fourth wave within the pror third wave. In this case, the first guideline suggests resistance in the 1069 area, and the second implies 1065-1071. Much beyond these levels, we would have to consider that this rally is more than a “normal” reaction.

Even if this rally proves to be stronger than we expect, the deterioration that is already evident, combined with overbought sentiment and a peaking 22-week cycle, suggests that the resulting divergences will indicate a more important top than the intermediate weakness that already exists.

Wednesday’s 1042 low is first support, and the October 2 low at 1020 is second support. But, as explained in yesterday’s post, there are two areas of support that could be of particular importance: 958-935 and 884-869. The first is both a 61.8 retracement of the July-October rally and a 38.2% retrace of the March-October uptrend. The second is a 50% retracement of the March-October uptrend and a full retrace of the July-October rally. Obviously, there are other levels (e.g., 1013 is a 38.2% retracement of the July-October rally) that we will use as guidelines, but those two are the most intriguing since they involve two different – and important – wave structures. They should prove to be our focus in the weeks ahead.