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.