Hindsight is 20/20

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On Monday, the S&P rallied 1.5%. Volume surged by 20%, but that is only because Friday’s total (3.9 billion shares) was one of the lowest of the year; Monday’s level was still below the 21-dma. Breadth was positive by a 9:1 margin and up volume outpaced down volume a by 6:1 ratio. The daily Coppock Curve still as a bullish bias for all 24 S&P industry groups.

Market analysis is typically a weight of the evidence discipline and more often than not the array of indicators can be prescient. But sometimes hindsight adds 20/20 clarity. The recent behavior of the S&P relative to its dominant post-March uptrend line is such an example. In late October, the “500” breached this daily trend line for the first time and we took that as an important change and a sign that the market was in position for its biggest decline since June-July. Last week, however, the S&P rallied back through that line and then pulled back to test it. Today’s surge followed that successful test.

As a result, October’s breach deserves to be viewed as a “false break.” That said, we will keep the line where it is and will not re-draw it to reflect the November 2 low. This is because the original line currently has four touch points; a new one would only have two. By definition, the more touch points a trend line has, the more important it is. Anyone can draw a “trend” line with only two touch points.

S&P 500 (Weekly)

While we are on the subject of trend lines, the weekly chart shows that the S&P is at an important confluence. Both the post-March uptrend line and the downtrend line from the 2007 highs are about to collide. Moreover, the downtrend line is currently at 1109.10 – compared to today’s 1109.30 close. It would seem that a decisive breach of this line would clear the way for a full challenge of the 1121-1156 resistance range that we have regularly highlighted. That said, the daily Coppock Curve has the potential to remain constructive for another 5-7 trading days, which suggests that such a challenge should occur fairly quickly or it may be a lost opportunity.

Last week’s test (at 1085) of the post-March trend line is first support. A break of that level would be further evidence that the rally from the November 2 low is corrective and would increase the risks for a test of the important 1029-1020 double-bottom.