Lower Lows Still Likely

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Yesterday, we described Monday’s action as “all over the place.” Tuesday was much different; it was an “inside day” (i.e., a lower high and higher low than those seen on Monday). As a result, Tuesday’s 0.2% gain was more modest than Monday’s 0.7% rally. Internally, however, Tuesday was a better day; breadth was positive by a 5:2 margin (versus Monday’s 4:3 spread) and upside volume increased by 20% despite an 11% decline in total volume. Nonetheless, the daily Coppock Curve has a bearish bias for all 24 S&P industry groups.

Cumulative Up-Down Volume (14-dma)

In yesterday’s post we suggested that Tuesday’s action would help determine whether a fifth wave down from last month’s high was extending or whether the index has begun a somewhat volatile corrective process. Taken by itself, Tuesday’s inside day, together with the healthy internals, leans toward the latter scenario.

Nonetheless, the S&P is by no means out of the woods. On-Balance volume is on the verge of breaking an important trend line. If it does, it would confirm the S&P's breach of a similarly important line. Moreover, it appears that the 22-week cycle has peaked, the weekly Coppock Curve is positioned to have a bearish bias through the rest of this year, and sentiment is at excessively bullish levels. All of this, together with the impulsive character of the decline from last month’s high, implies lower lows in the weeks ahead.

Our focus is on the October 2 low at 1020. A break of that level will effectively signal that the rally from the July lows is over. Below that, 1013 is a 38.2% retrace of the July-October rally and 985 is a 50% retracement. But, as explained in recent posts, more important support may be seen at 958-935 and 884-869.

Nearby resistance is at 1049-1054.