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.