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On Monday, the S&P posted its sixth straight gain with a rally of 2.2%. Both breadth and the up/down volume ratio were sufficiently strong to generate the first 9:1 day since August 21. However, while total volume increased slightly, it was still well-below its 21-dma. The daily Coppock Curve now has a bullish bias for 23 of the 24 S&P industry groups.

Those readers who follow the Elliott Wave Principle are probably aware that the consensus count has us on the verge of a Primary third wave decline. For those readers less attuned to the Wave Principle, that means that the S&P is at risk of a decline that could be at least as devastating as the 2007-2009 decline (aka, Primary wave 1). We have consistently taken exception to that count, believing that the market environment is more benign. That said, the strength of Monday’s rally took us by surprise. It probably means that higher highs are likely in the weeks immediately ahead.

In Thursday’s blog, we pointed to short term resistance at 1065-1074 and 1096. And, in our monthly Insights we pointed to a count that still allowed for new rally highs; although we felt that the corrective nature of the rally from the November 2 low weakened that possibility, Mr. Market apparently feels otherwise. Meanwhile, the non-Elliott evidence still shows deteriorating medium term momentum, excessively bullish sentiment, and a declining 22-week cycle, all of which suggests that the rally from last week’s low is best viewed as a short term event in the context of a poor intermediate environment. As such, it should prove to be more of an ending than a beginning.

S&P 500 and 10-day CBOE Put/Call Ratio

Nonetheless, we need to respect the potential for higher highs. There are two primary reasons for this. First, even though the overall structure from November 2 is internally corrective, the rally from last Friday’s low could be counted as a fifth wave. However, Monday’s follow-through was enough to make the third wave the shortest impulse wave within the sequence; that is an Elliott Wave no-no and implies that the rally is extending. Second, Monday’s rally proved to be strong enough to turn the daily Coppock Curve to up, from down; the resulting bullish bias has the potential to last for the better part of the next two weeks. Beyond that, it is worth noting that the 10-day CBOE put/call ratio has moved to its most oversold level in a year.

While the six-day winning streak suggests that the S&P is due for a pullback, the above “internals” imply higher highs, corrections along the way notwithstanding. We have had an eye on 1121-1156 as an important resistance area for some time. It is important because it encompasses both external Fibonacci relationships relative to the entire 2007-2009 decline and internal wave relationships comparing the post-July rally to the March-June uptrend. There is intervening resistance at 1096-1101. Support is at 1070-1060, then 1030-1020.