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.
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