A Linear Downtrend

This is our 200th post on this page!!

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On Thursday, the S&P 500 fell 1.2%. Breadth was negative by 9:2 and the up/down volume ratio was in the red by a bit less than 2:1. Total volume increased by 3%. The daily Coppock Curve is negative for 22 of the 24 S&P industry groups and is positioned to remain negative for a majority of the groups for another week or so.

In our last post, we thought that the hourly chart had enough divergences to suggest that a five wave decline was complete and that the S&P had the potential to have a “bounce in its step” in coming days. Thus, Thursday’s decline to lower reaction lows complicates things a bit.

S&P 500

The inability of the hourly RSI to cross above the neutral “50” line (or the hourly Coppock Curve to cross above the neutral “zero” line) suggests that the downtrend from the January 19 high is a trending or linear pattern. Thus, the short term bias will remain down until the “500” crosses through the resistance downtrend line and/or the hourly momentum indicators cross above their respective neutral lines.

Meanwhile, Thursday’s action may have taken away some of the impulsive qualities of this decline. Or maybe it didn’t. We say that because the last three days show some overlaps on the daily chart. There are several counts that can account for this. The pattern could be moving toward the corrective end of the scale or it could be on the verge of a “3 of 3” downside acceleration. And there is evidence for both sides of that question and the impulsive quality of the decline is still very much in play. That said, we will let the market clarify things in coming days.

Regardless, the damage is done and, as mentioned in yesterday’s post, the second domino has fallen and the rally from at least the July low is complete.

The third domino is 1029-1020. That level represents the lows of the aforementioned October-November correction. A breach of that range, which we have used as tactical support, would confirm the completion of the post-March bear market rally. That range also lies between 1043-1010, which represents a 38.2%-50% retracement of the July-January rally. Therefore, it is not a stretch to suggest that tactical support is now first support.

First resistance is 1103. That level is both chart resistance on the hourly chart and can be counted as the second wave of prior degree. Second resistance is 1114-1115, which represents the recent breakdown point as well as a 38.2% retracement of the decline from January’s high.

The Second Domino Falls

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On Monday, the S&P 500 rallied 0.5%. Breadth was positive by a 4:3 margin and up volume outpaced down volume by a 3:2 ratio. For a change, total volume increased (by 12%) on an up day. However, the daily Coppock Curve is still negative for 22 of the 24 S&P industry groups.

From our perspective, it is not terribly significant that Wednesday was an up day. The more important feature was that, during the day, the S&P broke below 1086-1085. We have referred to that support zone as the second domino in a potentially significant decline. So, although the breach was temporary, it did occur.

S&P 500 Daily

What is the significance? At a minimum, it locks in the rally from July’s low (at 869) as a complete pattern. Thus, we will expect to see at least a 38.2% retracement of the July-January rally. However, since momentum remains weak, it is quite possible that we will see more than that minimum expectation.

That said, we have been counting the October-November correction as being as important as July’s pullback. If that is correct, then we will respect the possibility that Wednesday’s break of 1086-1085 actually marked the end of the bear market rally from last March’s low (667). That, in turn, would mean that Fibonacci relationships should be applied to the entire March-January pattern. More importantly, a reversal of the post-March pattern would imply that the downtrend from the 2007 high is about to reassert itself.

Meanwhile, yesterday’s low can be counted as the completion of a five wave decline on the hourly chart. We say “completion” because those lows were not confirmed by either the hourly Coppock Curve or the hourly MACD. Thus, it would seem that the S&P may have some bounce in its step in the next few days. But our wave count, together with non-Elliott considerations (such as volume, momentum, sentiment, and trend), suggests that a nearby rally will not be sustainable and that lower lows will follow.

The third domino is 1029-1020. That level represents the lows of the aforementioned October-November correction. A breach of that range, which we have used as tactical support, would confirm the completion of the post-March bear market rally. That range also lies between 1043-1010, which represents a 38.2%-50% retracement of the July-January rally. Therefore, it is not a stretch to suggest that tactical support is now first support.

First resistance is 1103. That level is both chart resistance on the hourly chart and can be counted as the second wave of prior degree. Second resistance is 1114-1115, which represents the recent breakdown point as well as a 38.2% retracement of the decline from January’s high.

A Bad Oversold Condition

We are now on Twitter as waltergmurphy. We will make brief posts when conditions warrant.

We will be in Bethesda for the next couple of days, so there will definitely not be a blog on Tuesday night and perhaps not on Wednesday night either.

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On Monday, the S&P 500 broke a three-day losing streak with a rally of 0.5%. Breadth was positive by a bit better than 3:2 and up volume outpaced down volume by a 5:4 margin. However, the internals were not entirely positive. The overall action resulted in an inside day (a lower high and higher low than Friday’s action) and total volume fell by 28%. Moreover, the daily Coppock Curve is negative for every one of the 24 S&P industry groups.

S&P 500 Hourly

Last week’s decline resulted in a “bad oversold” condition. This is a confirming situation that typically results in a rally (that helps to work off the oversold reading), followed by renewed weakness that establishes one or more lower lows. As those lows occur, we begin to look for positive divergence.

As an example of the confirming bad oversold condition, Friday’s 5.1% three-day rate of change was the lowest since March (which was a positive divergence when compared to October and November 2008). Similarly, the hourly Coppock Curve reached its lowest reading since October (that’s a lot of hours).

At the same time, we can make a case that the DJIA has now achieved five waves down from last week’s high. We have to use a fifth wave “failure” to achieve that count, but it is certainly doable. Last week, we could not say that for the DJIA. Last week we could (did and do) count five waves down on the S&P, but not for the DJIA. So the DJIA has now caught up with the S&P in that regard.

That said, there is some chatter that the five wave pattern is a “C” wave. But the breach of support, increased down volume, weak momentum, and trend line breaks suggests that the decline is the beginning of something, not the end.

Next support exists at 1086-1085. In turn, a break of that range would, at a minimum, lock in the rally from the July low (and probably the March low) as a complete pattern.

As for resistance, 1105-1116 is the fourth wave of prior degree within the five-wave decline from last week’s highs; this is a typical resistance area. (Monday’s high was 1103.) Second resistance is the 1133-1136 breakdown point from the 1150 bear market rally high.

Short Term Review

The latest Short Term Review has been posted to the website (www.wminsights.com). Below is the the "Plain English Summary" from page 1 of the report.

Stocks: We think there is a strong case to be made that last Monday’s high could prove to be the peak for the year. At the least, the current evidence suggests that it should be one of the three or four most important inflection points of 2010.

10-Year Yields: We will have to be alert to the possibility that yields will ultimately be positioned for a test of the October-November double bottom at 3.175%.

US Dollar: The dollar’s pattern from its November 2008 high is a corrective structure, which means that the rally leading into that high should prove to be the first leg of a larger uptrend. If so, then the upside potential in the months ahead should significantly outweigh the downside risk, even allowing for a test of the recent lows.

Commodities: Any further pressures are likely to carry gold to new reaction lows that, in turn, would translate into a confirmed downtrend. The weight of the evidence favors lower lows for oil over the near to medium term.

For the full analysis, please visit the website for subscription information.

Potentially a Lot Further to Go

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On Thursday, the S&P 500 suffered its sharpest decline since late October with a loss of 1.9%. Breadth was negative by better than 6:1 and up/down volume was in the red by almost 7:1. Perhaps most importantly, total volume surged by 43%. The daily Coppock Curve is negative for 22 of the 24 S&P industry groups.

Over the past nine sessions there have been five up days and four down days. All five rally days occurred on lower volume, while each of the four setbacks was accompanied by higher turnover. So, distribution has clearly been evident over the past two weeks. That came home to roost on Thursday as the sharp decline was part of what is now a five-wave downleg. Moreover, the index has now violated every uptrend line of note beginning from the March lows. It would seem, therefore, that this new downtrend has further to go. Potentially a lot further to go. It is possible that the minimum requirements for a complete “bull market” pattern from March’s low have been satisfied.

S&P 500

That said, two days do not necessarily make a trend. Indeed, while the S&P has accelerated down from Wednesday’s high, it has stalled a bit in the 1118-1111 area. Readers may recall that in yesterday’s post we pointed to that range as both Fibonacci support and potentially strong chart support. Thus, a breach of that range would likely signal further weakness toward the December low itself at 1086-1085. In turn, a break of that range would, at a minimum, lock in the rally from the July low (and possible the March low) as a complete pattern.

With that in mind (and as mentioned above), the decline from Wednesday’s low has a distinct five wave look to it. Given the other evidence (volume, momentum, and trend line breaks), it seems very likely that this five wave pattern will prove to be the first leg of a larger downtrend.

Given the breakdown of recent days, the 1131-1150 top formation is now important resistance. A rally through that range would a) be a surprise and b) place the S&P in position to challenge what is still important resistance near 1158.

A Domino Falls

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On Wednesday, the S&P 500 fell 1.1%. Breadth was negative by 11:2, which is the most negative margin since late November. Up/down volume was also negative, but by a more modest 10:3 ratio. However, volume increased by 3%. The daily Coppock Curve is negative for 20 of the 24 S&P industry groups.

The S&P 500 declined by over 1% in two of the past three days and gained 1% on the other. Volume increased on the two down days but fell off on the up day. All of this suggests a bout of distribution.

The index broke below 1130 on Thursday. This effectively locked in the rally from the December 9 low as a complete pattern. Since that rally can be counted as the “C” wave of an ABC uptrend from the November 2 low, it is therefore possible to count the November-January pattern as having ended. And, since we have been treating the post-November structure as the final leg (i.e., the “E” wave) from the March lows, it is now possible to suggest that the minimum requirements for a complete “bull market” pattern have been satisfied. In recent comments, we have described this as a potential domino effect. If this proves to be correct, then the risk is that Thursday’s relatively modest setback will have an impact on increasingly larger wave degrees.

S&P 500

That said, the S&P still has a lot of work ahead of it to knock over the next domino, which requires a break below the December low itself at 1086-1085. Such a break would, at a minimum, lock in the rally from the July low (and possible the March low) as a complete pattern. Since 1086-1085 is not even close to a 38.2% retracement of the post-July rally, a breach of that range would likely imply importantly lower lows.

All that said, it is possible to count the range of recent days as a triangle. If so, then the S&P may still have a final last gasp rally left in it. But given the toppled domino, as well as the momentum and sentiment concerns mentioned in recent comments, the upside potential is likely a fraction of the downside risk. As mentioned in the recent STR, this is not the time to be committing new funds to the equity market.

With the rally from December 9 now complete, Fibonacci support is indicated in the 1126-1111 range. The 1118-1111 range also includes potentially strong chart support. A violation of these levels will open the door for a move to 1086-1085.

There is now a triple top at 1150, so a breakout through 1150 would allow for further strength toward 1158. As mentioned in many past comments, the 1121-1158 range involves a number of important Fibonacci relationships. As a result, a breakout through that range would be, almost by definition, a bullish development.

Mr. Market Knows Best

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The New Year has had 11 trading days and the S&P 500 has been up for nine of them. On Tuesday, the index gained 1.3%. Some of the market mavens attributed this strength to the election in Massachusetts. Go figure. Regardless, both breadth and up/down volume were positive by about a 5:1 margin. However, total volume fell 4%. The daily Coppock Curve is positive for 14 of the 24 S&P industry groups.

In recent comments, we have gone to some length to describe a potential domino effect. Our thought has been – and still is – that even a modest setback could have an impact on increasingly larger wave degrees. Indeed, in our recent Short Term Review, we suggested that a decline back below last Friday’s low could set those pressures in motion. It seems that the market sensed the proximity of an important support level as it opened strongly on Tuesday and never looked back.

S&P 500 Hourly

Now, with the index once again probing the 1150 area, we have to keep an eye on 1158. As mentioned in many past comments, the 1121-1158 range involves a number of important Fibonacci relationships. As a result, a breakout through that range would be, almost by definition, a bullish development.

Thus, the index has two potentially significant reference points: support at 1131 and resistance up to 1158. Arguably, the 27-point interval between those two points is something of a no man’s land. Frankly, our thought was that momentum, sentiment, and our wave count were strong enough to indicate an imminent breach of support. But, at least on Tuesday, the market seemed to have other ideas.

All that said, a decline through 1132-1131 during the balance of this week will effectively lock in the rally from December 9 as a complete pattern. Until that happens, we will continue to give the current trend the benefit of the doubt. Second support remains at 1086-1085.

A rally decisively through 1158 would do much to open the door for a move through 1200.

Short Term Review

A new Short Term Review has been released. Below is the "Plain English Summary" from the first page.

Stocks: In our last comment we suggested that things could not get much better. Well, in the end, maybe they did not. We have to be prepared for a decline that could handily exceed 35%.

10-Year Yields: From a non-Elliott perspective we respect the possibility that yields are engaged in a head-and-shoulders bottoming formation that has been in progress since early 2008. Moreover, both intermediate and long term momentum oscillators have a bullish bias Finally, sentiment is no worse that neutral. All of this suggests that the underlying pressures are still up, not down.

US Dollar: We still think the dollar’s pattern from its November 2008 high is a corrective structure, which means that the rally leading into that high should prove to be the first leg of a larger uptrend. If so, then the upside potential in the months ahead should significantly outweigh the downside risk, even allowing for a test of the recent lows.

Commodities: Gold may have had an important downside reversal last week and it would seem that the downtrend that began six weeks ago has more life left in it.

For the full report, please visit http://wminsights.com for subscription information.

Do You Feel Lucky?

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Earlier in the week, I did two interviews. Please see: http://watch.bnn.ca/trading-day/january-2010/trading-day-january-11-2010/#clip254197 and http://media.mta.org/podcasts/2010-JAN12-waltermurphy.mp3.

On Thursday, the S&P 500 posted its 8th gain in nine days with a rally of 0.2%. Breadth was positive by a 5:4 margin. The up/down volume ratio was positive by 4:3 but total volume fell by 6% and is back below its 21-dma. The daily Coppock Curve is positive for 13 of the 24 S&P industry groups.

The S&P recorded new recovery highs on both an intra-day and closing basis. However, only 171 NYSE common stocks made a new 52-week high, compared to the 280 new highs earlier in the week. This contrasts with the 609 common stocks that are more than 10% below their 52-week high (and 296 that are at least 20% below their 52-week high).

S&P 500 with Post-March Fibonacci Retracement Levels

That brings us back to a point that we have made in the past. Once the post-March rally is over – and it will eventually come to an end – we would expect at least a 38.2% retracement. From Thursday’s high, that would imply a minimum 16% decline; 61.8% retracement would result in a 26% sell-off. Obviously, there are other scenarios, but it is not a stretch to suggest that one needs to expect a 15% rally from current levels (to near 1325) to be able to justify an equal risk/reward ratio. That is possible, but the market engaged in a structural bear market rally, volume is in a downtrend, sentiment is at excessively bullish levels, the dividend yield is at levels last seen in late 2007, and the four year cycle is likely exerting pressure. So, in the words of Clint Eastwood’s Harry Callahan character, “You've got to ask yourself one question: 'Do I feel lucky?’”

All that said, we are tempted to raise first support to 1132-1131 but, for now, our focus will remain on 1115-1114; a decline through that range would effectively lock in the rally from December 9 as a complete pattern. Until that happens, we will continue to give the current trend the benefit of the doubt. Second support remains at 1086-1085.

Meanwhile, there is still the potential for a continued challenge of the top end of our long- will deal with a breakout if and when it occurs.

Thomas Friedman and James Chaos

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Earlier in the week, I did two interviews. Please see: http://watch.bnn.ca/trading-day/january-2010/trading-day-january-11-2010/#clip254197 and http://media.mta.org/podcasts/2010-JAN12-waltermurphy.mp3.

Errata: In yesterday’s post our head must have been in the clouds as we apparently overlooked (it was there) a row of data in our spreadsheet. We noted that, surprisingly, 2007 had more up days than down and that 2003-present represented a six year winning streak. The surprise year was 2008 and the winning streak is seven years. The errors of observation had no impact on our analysis. Thank you to the reader who pointed this out to us.

The S&P 500 recovered on Wednesday with an 0.8% rally. Breadth was positive by better than 4:1. The up/down volume ratio was positive by 5:2 but total volume fell by 11%. The daily Coppock Curve was positive for 13 of the 24 S&P industry groups.

In Wednesday’s New York Times, Thomas Friedman noted that James Chanos (a well known short seller) is looking for ways to short China. Friedman disagreed for a number of reasons and concluded by saying “Well good luck with that Mr. Chanos. Let us know how it works out for you.”

Separately a Google Elliott Wave group, without reference to the Friedman column, noted the weak relative strength pattern of China relative to the US. Unfortunately, that group used a China ETF.

Shanghai Composite Relative to the DJIA

All that said, the nearby chart, which compares the Shanghai Composite to the DJIA, suggests that we might be better of siding with Chanos and the ewave list. Last July’s relative high can be described as both a double top and the head of a head-and-shoulders top formation. Both patterns suggest that a breakdown through the lows of the past six months could be a significant reversal.

As for the S&P, our near term focus remains on nearby support at 1115-1114; A decline through that range would do much to lock in the rally from December 9 as a complete pattern, which would satisfy the minimum requirements for perhaps two larger wave degrees of trend. Until that happens, we will continue to give the current trend the benefit of the doubt. Second support remains at 1086-1085.

Meanwhile, there is still the potential for a continued challenge of the top end of our long-standing 1121-1156 resistance range. We will deal with a breakout if and when it occurs.

Six and Counting?

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On Monday I did an interview on Canada’s Business New Network. The link is: http://watch.bnn.ca/trading-day/january-2010/trading-day-january-11-2010/#clip254197.

On Tuesday I did an MTA podcast, hosted by friend and fellow technician Ed Carlson. The link is: http://media.mta.org/podcasts/2010-JAN12-waltermurphy.mp3.

The S&P 500 fell 0.9% on Tuesday, breaking a seven day winning streak. Breadth was negative by a bit less than a 9:2 margin. The up/down volume ratio was negative by better than 5:1 and total volume increased by 12%. Thus, Tuesday goes down as a distribution day. The daily Coppock Curve was negative for 14 of the 24 S&P industry groups.

Well it looks like 2010 won’t go down in the record books as a perfect year. After six straight up days to start off the year, the string was finally snapped on Tuesday. That got us to thinking. How many days in a given year can be expected to be up days? We were somewhat surprised by the answer.

In the 47 years from 1963 through 2009, fully 35 (74.5%) had more up days than down days(based on the S&P 500). Moreover, there have been three winning streaks of at least six years, all of which have bee relatively recent. So there has not only been a bullish bias overall, but a winning streak can be sustained for a fairly long period.

The three winning streaks were 1985-1990, 1992-1999, and 2003-present. That presents two observations. First, most people would probably be surprised to find that 2007 had more up days than down (the final tally was 127 to 126). So it would seem that, like Longfellow’s little girl, when the 2007 market was good, it was very good indeed, but when it was bad it was horrid. Second, it would seem that, since the market has had more up days than down for six straight years, it would not be unreasonable to see that streak broken in 2010.

S&P 500 Hourly

Tuesday’s weakness did not upset any apple carts, so our near term focus remains on nearby support at 1115-1114; A decline through that range would do much to lock in the rally from December 9 as a complete pattern, which would satisfy the minimum requirements for perhaps two larger wave degrees of trend. Until that happens, we will continue to give the current trend the benefit of the doubt. Second support remains at 1086-1085.

Meanwhile, there is still the potential for a continued challenge of the top end of our long-standing 1121-1156 resistance range.

Getting (52-week) High

Our most recent Short Term Review has been released. Anyone interested in becoming a subscriber should send an e-mail to either wmgallc@gmail.com or customerservice@wminsights.com.

Separately, I did an interview on Canada’s Business New Network (based on the Year Ahead piece). You can view the interview (and my boyish good looks) by clicking this link: http://watch.bnn.ca/trading-day/january-2010/trading-day-january-11-2010/#clip254197.

The S&P 500 rallied 0.2% on Monday. So far, the index has not had a down day in 2010. Breadth was positive by a 7:6 margin. The up/down volume ratio was positive by 9:5, but total volume fell for the second consecutive day. The daily Coppock Curve was positive for 14 of the 24 S&P industry groups.

On Monday, 280 NYSE common stocks made a new 52-week high, which compares very favorably with the 282 new highs recorded last October. Indeed, we would be hard-pressed to call this a divergence. Similarly, daily On-Balance Volume has moved to within a hair’s breadth of making a new 2009-2010 high. Both of these developments are evidence that the rally still has some life left in it. That “life” may well require a period of backing and filling – or an extended – correction – in order to lay the foundation for the divergences that may still be needed.

NYSE OBV

That said, it is possible to count five waves up from the March highs on both the 52-week and (especially) the OBV charts. This count is very much in line with our primary count for the S&P 500. So while the market may still need to do what it has to do to create the type of divergences that lead to a significant reversal a subsequent rally would seem to be quite likely.

Nonetheless, a five wave count from the March low suggests that a coming correction – with or without divergences – will have a Fibonacci relationship with the entire post-March uptrend. In turn, that means at least a 38.2 retracement, which translates to a minimum 15%-20% correction.

So, traders have to ask whether they expect a 15%-20% rally – or anything close to it – over the near to medium term. If not, then rallies should be increasingly used to become more defensive,

Our near term focus remains on nearby support at 1115-1114; A decline through that range would do much to lock in the rally from December 9 as a complete pattern, which would satisfy the minimum requirements for perhaps two larger wave degrees of trend. Until that happens, we will continue to give the current trend the benefit of the doubt. Second support remains at 1086-1085.

Meanwhile, the S&P has decisively pulled away from resistance at 1137. Thus, the potential is greater for a challenge of the top end of our long-standing 1121-1156 resistance range.

STR and BNN

The latest Short Term Review (STR) has been sent to our subscribers. Anyone interested in becoming a subscriber in order to receive a copy should send an e-mail to either wmgallc@gmail.com or customerservice@wminsights.com.

For our Canadian friends, we will be doing an interview on the Business News Network (BNN) on Monday at 2:05. The primary focus will be on our recent Year Ahead report.

13 Days

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On Thursday, the S&P 500 rallied 0.4%. This was the index’s fourth straight gain to begin 2010. Breadth was positive by a 3:2 margin and the up/down volume ratio was positive by better than 5:2. Total volume increased 6% to its highest level since mid December. The daily Coppock Curve was negative for 13 of the 24 S&P industry groups.

The above summary of Thursday’s action brings into focus three developments: 1) underlying strength over the past 13 days, 2) an increase in volume, 3) some erosion in momentum. The first two are related because the last time daily volume was higher than Thursday’s level was December 18, which was the first day the current 13-day run. Nonetheless, an examination of both the return over the past 13 days (4.2%) and underlying volume patterns suggests that the recent “strength” has been nothing to write home about. Both the 13-day rate-of-change and the volume patterns have essentially been in downtrends since at least their respective summer peaks and arguably since their March-April breakouts. This combination suggests that the market is experiencing underlying distribution and/or malaise.

It is also worth noting that we had do go back to 1995 in order to find a better string of gains over a 13 day period. History suggests that it typically does not get any better than 11 out of 13. That, together with the fact that there are initial signs of near term momentum deterioration, suggests that the breakout from the November-December Elliott Wave triangle is running out of steam.

S&P 13-day ROC and NYSE Volume Momentum

That being said, our near term focus remains on nearby support at 1115-1114; A decline through that range would do much to lock in the rally from December 9 as a complete pattern, which would satisfy the minimum requirements for perhaps two larger wave degrees of trend. Until that happens, we will continue to give the current trend the benefit of the doubt. Second support remains at 1086-1085.

Meanwhile, we have respect the possibility that the S&P has begun to decisively pull away from resistance at 1137. If so, then the potential nominally exists for a challenge of 1156. But with signs of deteriorating momentum, further strength may become increasingly difficult.

Dominoes

Our Year Ahead has been sent to our subscribers. Anyone interested in either becoming a subscriber or separately purchasing the Year Ahead issue should send an e-mail to either wmgallc@gmail.com or customerservice@wminsights.com.

On Wednesday, the S&P 500 gained a bit more than 0.05%. But that was enough for the index to post its third straight gain of the new year, aided by modestly positive breadth and an up/down volume ratio of 9:4. Total volume was essentially unchanged (down 3%). The daily Coppock Curve still has a bullish bias for 15 of the 24 S&P industry groups.

From a short term Elliott Wave perspective, we can make the case that the rally from the December 31 low at 1114-1115 is the fifth wave of a larger degree uptrend that began on December 9. That could be important because this five wave rally from December 9 followed a November-December trading range that we have described as a triangle or some other continuation pattern. If, in fact, that trading range was a triangle, then the rally from December 9 would have to be counted as the final “C” wave of a rally that began on November 2. In turn, the rally from November 2 can be counted as the final “E” (or fifth) wave from the March low.

S&P 500

So, in a sense, there is an Elliott game of dominoes at play. A decline below 1115-1114 would do much to lock in the rally from December 9 as a complete pattern, which in turn would satisfy the minimum requirements for perhaps two larger wave degrees of trend.

Much of this is predicated on the idea that the aforementioned trading range really was a triangle. In Elliott, a conventional triangle is a penultimate pattern within a larger trend. So, by definition, the post-triangle thrust from the December 9 low is the final leg of that larger trend. In the end, it will take a breach of the December low (1086-1085) to truly set the dominoes in motion.

Meanwhile, the S&P is struggling with resistance at 1137. We have pointed to 1137 as a resistance area within the larger 1127-1156 band that we have been highlighting for some time. Thus, a rally through 1137 would nominally open the door for a challenge of 1156. But if momentum is positioned to fatigue in coming days, a move to 1156 might be a difficult chore. As a result, we will watch to see if 1137 or slightly above proves to be an important barrier.

We will continue to give the post-November uptrend the benefit of the doubt until it gives us a sign that a potential reversal may be imminent. Nearby support is at 1115-1114, but it will take a break of 1086-1085 to end the post-July series of higher lows and higher lows.

As a follow-up to yesterday’s post, a three-day winning streak to launch a new year has happened 15 times in the previous 81 years. A four day New Year winning streak has occurred only eight times.

Hello 1137

Our Year Ahead has been sent to our subscribers. Anyone interested in either becoming a subscriber or separately purchasing the Year Ahead issue should contact either wmgallc@gmail.com or customerservice@wminsights.com. Below is the report’s “Plain English” summary for the stock market.
While there are some mixed signals, especially for the first half of the year, the evidence seems to suggest that the second half of 2010 will see the S&P experience its most important decline since the 2007-2009 sell-off. Even under the best of circumstances, this implies a potential for a decline of 20% or more; it could bring back memories of the 2007-2009 decline itself.

The S&P 500 continued its New Year run with a rally of 0.3%. Breadth was only modestly positive, but the up/down volume ratio was positive by a solid 11:4 margin. Total volume increased by 28% and poked above its 21-dma. The daily Coppock Curve has a bullish bias for 15 of the 24 S&P industry groups.

Lest anyone get too excited by the back-to-back gains to start off the New Year, it is not all that uncommon. By our reckoning it happened 28 times in the previous 81 years. And it is no guarantee of a good year – some of the more notable failures despite a good start were 1929, 1931, 1974, 1987, and 2002.

S&P 500 30-minute Point and Figure

Short term momentum is still constructive and appears to have the potential to hang in there for another week or so. This, plus the fact that the uptrend is still very much intact, suggests that the S&P has the potential to rally through the 1137 area in the days ahead. We have pointed to 1137 as a resistance area within the larger 1127-1156 band that we have been highlighting for some time. Thus, a rally through 1137 would nominally open the door for a challenge of 1156. But if momentum is positioned to fatigue in the next week or so, a move to 1156 might be a difficult chore. As a result, we will watch to see if 1137 or slightly above is more important than we might have thought.

We will continue to give the post-November uptrend the benefit of the doubt until it gives us a sign that a potential reversal may be imminent. Nearby support is at 1094-1093, but it will take a break of 1086-1085 to end the post-July series of higher lows and higher lows.

A Little Bit of Something for Everyone

We have finished writing the Year Ahead report. However, we still have to add the charts and put it through a final proofread. We expect to release the report to subscribers by Tuesday, or Wednesday at the latest. Anyone interested in either becoming a subscriber or separately purchasing the Year Ahead issue should contact customerservice@wminsights.com.

The S&P 500 began 2010 on a solid note with a rally of 1.6%. Both breadth and up/down volume ratios were positive by better than 6:1; this was the best performance for each since mid November. Total volume, which was almost double Friday’s total, seems to have come out of its holiday malaise; nonetheless, it is still below its 21-dma. The daily Coppock Curve has a bullish bias for 15 of the 24 S&P industry groups.

Volume Flow
Monday’s rally carried both the S&P 500 and S&P 600 (small cap) indexes to new recovery highs on both an intra-day and closing basis, and various a-d lines are either currently, or were very recently, at new recovery highs. However, only two of the 24 S&P industry groups finished at a new closing high. Moreover, the Bullish Percentage Indexes for the S&P 500, 400, and 600 are all below the previous recovery high (although all have moved above their respective 10-day moving averages). And to top it off, our measure of volume flow is well below its August peak (and its December peak for that matter).

So there is a little bit of something for everyone. Bulls can point to breakouts, while bears can point to a myriad of divergences.

For our part, we continue to give the post-November uptrend the benefit of the doubt. At the most basic level, the trend is engaged in a series of higher highs and higher lows. Moreover the November-December trading range is best counted as an Elliott Wave triangle, which is a continuation pattern. Thus, despite the divergences, we have to go with the idea that the trend will remain intact until it gives us a sign that fatigue – and a potential reversal – is at hand. At this point, it will likely take a break of 1086-1085 to end that series of higher lows and could be an initial sign of a reversal. There is intervening support at 1094-1093.

As for resistance, the “500” is currently in the 1121-1156 range that we have been highlighting for some weeks. Within the range, resistance is indicated near 1137. A breakout through 1156 would allow for further strength toward 1170 and perhaps 1200+.