Bending but Not Yet Broken

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It could have been worse.  On Thursday, the S&P 500 finished the day with a loss of 0.2% after having been down as much as 1.7%.  Despite a solid afternoon recovery, both breadth and the up/down volume ratio were negative by a 9:8 margin.  Total volume expanded by 9% from Wednesday’s total, effectively continuing its recent tendency to increase on down days and decrease on up days.  The daily Coppock Curve still has a bullish bias for all 24 S&P industry groups.

Thursday’s action presents us with a bit of a conundrum.  The early sell-off violated the support trend line of the channel we showed in yesterday’s post.  The afternoon rally then tested, but did not penetrate, that same trend line.  As a result, a case can be made that the trend line is now a resistance line.   That combination can be considered a negative (i.e., a breakdown then a test of the breakdown point).

However, an hourly low (post-February 9) was accompanied by a decent positive RSI divergence.  Moreover, both the hourly and daily Coppock Curves currently have a bullish bias and the 10-day CBOE put/call ratio is more oversold than not.  All of this is viewed as a net positive.

While we remain of the opinion that the S&P will at least test, if not penetrate, the early February low (at 1044) before a new intermediate rally takes hold, our sense is that Thursday afternoon’s rally will follow through and try to test the 1110-1116 range yet again.  Thus, while the uptrend from the February 5 low is bending, it has not yet been broken.

But, even if 1110-1116 is tested, it will likely be a last gasp.  We have made the case that the daily Coppock oscillator would remain positive into the early days of March and March begins next week.  Since a near term peak is likely to have negative medium term implications, we have to be alert to the idea that a coming peak – which is probably only days away – will lead to a decline that should last several weeks.  So, from an intermediate perspective, the downside risk likely outweighs the upside potential in terms of both price and time.

The aforementioned 1110-1116 resistance range encompasses a 61.8% retracement of the January-February decline, the point at which the “C” wave of the current rally is 1.618 times the “A” wave, and chart resistance generated by the late December low.  Clearly, a breach of that range would be at least a short term plus and imply further strength toward 1131-1150.

In the weeks ahead, we still think that the S&P is positioned to at least test, if not violate, its recent low near 1045.  Below Thursday’s low at 1086, next support is indicated at the 1078-1075 breakout point.  A breach of 1057 would be viewed as a breakdown.  Our longer term focus, of course, is on tactical support at 1029-1020.

It’s Not Over ‘Til It’s Over

We are moving!  Hopefully by the end of next week – perhaps sooner – our blog will be available to all readers in the Comments section of our website, www.wminsights.com.   Insights and the Short Term Review will continue to be available only to subscribers.  Further details will be posted when they become more certain.  Readers interested in becoming a subscriber should send an e-mail to walter@wminsights.com. We are also on Twitter as waltergmurphy.

On Wednesday, the S&P 500 recovered from Tuesday’s “tail wagging the dog” sell-off with a gain of 1.0%.  Breadth was positive by 11:4 and the up/down volume ratio was positive by better than 3:1.  Despite the rally, total volume dropped by 8% from Tuesday’s total.  The daily Coppock Curve has a bullish bias for all 24 S&P industry groups.

In the early days of February, we were looking for a short term momentum low and suggested that, when momentum did bottom, the resulting bullish bias could persist for 2-3  weeks.  As it happened, the daily Coppock oscillator bottomed 11 days ago and currently appears positioned to remain bullish for another 4-8 days.  So it would seem that near term momentum still has some life left in it, but has not been overly powerful.

At the same time, intermediate momentum has been – and still is – positioned to be under pressure into late March/early April.  As a result, our ongoing expectation that intermediate pressures will withstand a near term rally still seems valid.

While the rally from the February 5 low may still have some life left in it, the overall pattern has been corrective.  For that matter, so does the bounce from Tuesday’s low.  This, together with the momentum configuration, suggests that the rally since February 5 will prove to be a counter trend move within a larger decline from January’s high.

With that in mind, the S&P has already challenged – and is struggling with – the 1110-1116 resistance range, which encompasses a 61.8% retracement of the January-February decline, the point at which the “C” wave of the current rally is 1.618 times the “A” wave, and chart resistance generated by the late December low.  Clearly, a breach of that range would be at least a short term plus and imply  further strength toward 1131-1150.

In the weeks ahead, we still think that the S&P is positioned to at least test, if not violate, its recent low near 1045.  However, there is no significant intervening support until the 1078-1075 breakout point.  A breach of 1057 would be viewed as a breakdown.  Our longer term focus, of course, is on tactical support at 1029-1020.

Bull Trap for Consumer Confidence

We are moving!  By the end of next week – hopefully sooner – our blog will be available to all readers in the Comments section of our website, www.wminsights.com.   Insights and the Short Term Review will continue to be available only to subscribers.  Further details will be posted when they become more certain.  Readers interested in becoming a subscriber should send an e-mail to walter@wminsights.com. We are also on Twitter as waltergmurphy.

On Tuesday, the S&P 500 had its largest decline in almost three weeks with a loss of 1.2%.  Breadth was negative by almost 11:2 and the up/down volume ratio was negative by a 6:1 margin.  Total volume expanded by 17% from Monday’s total.  The daily Coppock Curve still has a bullish bias for 23 of the 24 S&P industry groups.

One of the more common reasons for Tuesday’s rout was a sharp decline in the Conference Board’s index of Consumer Confidence.  That reasoning may be a case of the tail wagging the dog.  The stock market is a leading economic indicator; consumer confidence is not (though consumer expectations are).  So, it is worth noting the nearby chart, which highlights the very close correlation between the S&P 500 and the Consumer Confidence index since the secular stock market peak in 2000.  (This close relationship is actually apparent for many years before 2000.)  So a case can be made that consumer confidence has been deteriorating because stock prices have begun to deteriorate, not the other way around.

That said, an examination of the Consumer Confidence index’s chart suggests that it just experienced a “bull trap,” which occurs when prices break above important resistance and generate a buy signal, but then reverse course and invalidate the buy signal (for this and other definitions, see the glossary in our website).  Thus, from the perspective of technical analysis, the Consumer Confidence index is positioned to work its way lower in the months ahead.

As for the S&P 500, we have already made the case in our Year Ahead piece that the second half of 2010 could see the most important decline since the 2007-2009 sell-off; that, too, might not bode well for consumer confidence.

In the weeks ahead, we still think that the S&P is positioned to at least test, if not violate, its recent low near 1045.   The Elliott Wave does not appear to be complete, sentiment is no better than neutral, and medium term momentum is positioned to maintain its current bearish bias for another 7-10 weeks.

There is no significant intervening support until the 1078-1075 breakout point.  A breach of 1057 would be viewed as a breakdown.  Our longer term focus, of course, is on tactical support at 1029-1020.

Last week’s high challenged the 1110-1116 resistance range, which encompasses a 50% retracement of the January-February decline, the point at which the “C” wave of the current rally is 1.618 times the “A” wave, and chart resistance generated by the late December low.  A rally through that range would open the door for further strength toward 1131-1150.

Bond Prices Ready to Rally

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On Monday, the S&P 500 broke a four-day winning streak with a loss of 0.1%.  Breadth was modestly negative, but the up/down volume ratio was modestly positive.  However, total volume continued its recent malaise and fell to its lowest level of the year.  The daily Coppock Curve has a bullish bias for all 24 S&P industry groups.

Meanwhile, the long bond posted its second inside day in a row (with a lower high and a higher low than the previous session).  This may be a sign of fatigue.  The nearby contract has been in a near term downtrend for much of February and in recent days began testing the late December, early January short term base.   While further – and deeper – testing is possible, we would note that the daily Coppock Curve is positioned to bottom by very early March while the weekly oscillator may have bottomed within the past week.  Thus, we will be alert to the idea that a near term low in the days immediately ahead will be fuel for an intermediate rally.

With that in mind, we would remind readers that we have regularly made the case that, while we can (and do) count a five wave rally for 10-year yields between December 2008 and August 2009, it is much more difficult to count a similar five wave decline for long bond prices over that same period.  A much more “obvious” count is that long bond prices fell in three waves from December 2008 to June 2009, and then rallied on three waves into October 2009.  The overall downtrend since then also has a corrective look to it.  All of this suggests that a larger structure is incomplete and that a coming rally will also be an inherently corrective pattern.

From a non-Elliott perspective readers may also remember that we have previously shown a possible head-and-shoulder top in the long bond (and a pending head-and shoulders bottom in 10-year yields), which has been unfolding since at least June 2008.  If a coming rally proves to be corrective, it will likely be part of the right shoulder, which still appears to be in progress.

That said, key support is in the 113-112 area (with some intervening support near 114:08).  A breach of that level would effectively break the multi-year “neckline” and argue for significantly lower level.

Equally important resistance is in the 117:16-123:24 area, though most of the resistance is in the narrower 117:18-121:13 range.  That represents the top end of the right shoulder, so a break of that range would weaken the pending H&S pattern.

Don’t Throw the Baby Out with the Bathwater

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On Thursday, the S&P 500 posted its third straight gain with a rally of 0.7%. Breadth was positive by a 7:3 ratio while up volume was greater than down volume by a bit more than 2:1. However, total volume fell by 9% to its lowest level of the month. The daily Coppock Curve has a bullish bias for 23 of the 24 S&P industry groups.

The biggest news on Thursday was the S&P’s rally through resistance at 1104-1105.  We have been putting some emphasis on that range for a while and, with this breach, the decline from January’s high takes on a distinct corrective (counter trend) look.

We are aware that there are those who count the entire decline from the January high to the February low as a full five-wave sequence.  We don’t agree.  In our view, the decline from the highs into late January was one pattern, the rally into February 2 was a second pattern, and the subsequent decline into  February 5 was the third and final structure.   Now that the February 2 high has been violated, a clean three-wave pattern is fairly obvious.

That said, we are not ready to throw the baby out with the bathwater.  We still think that intermediate momentum will withstand this near term strength.  Moreover, the February 5 low was too early by historical standards to be a 22-week cycle low.  Also, the hourly chart shows negative momentum divergences that could be the precursor to divergences on the daily chart in the days ahead.  Thus, the risk remains for a move back to or through February’s 1044 low once the current rally runs its course.

Nonetheless, the rally through 1104-1105 (together with still constructive momentum) turns our immediate focus on 1110-1116.  That range encompasses a 50% retracement of the January-February decline, the point at which the “C” wave of the current rally is 1.618 times the “A” wave, and chart resistance generated by the late December low.  A rally through that range would open the door for further strength toward 1131-1150.

On the downside, there is no significant support until the 1078-1075 breakout point.  A breach of 1057 would be viewed as a breakdown.  Our longer term focus, of course, is on tactical support at 1029-1020.

Up, Close, and Personal

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On Wednesday, the S&P 500 gained 0.4%. Breadth was positive by less than a 2:1 ratio while up volume outpaced down volume by a bit more than 2:1. Total volume was marginally better than Tuesday’s turnover, but remains well below its declining 21-day ma. The daily Coppock Curve has a bullish bias for 23 of the 24 S&P industry groups.

In recent posts we have regularly made the case that 1104-1105 is an important resistance area for the S&P 500.  This is because a rally through that resistance will do much to define the decline from January’s high as a corrective pattern.

Moreover, the rally from the February 5 low (which is corrective in its own right) has important internal resistance just above 1100.  So, with Wednesday’s high at 1100, the rally is now up, close, and personal with a significant resistance area.

With that in mind, near term momentum is still constructive.  Readers may recall that, in an early February post, we suggested that near term momentum was on the verge of bottoming and that a new bullish bias could last for 2-3 weeks.  That still seems to be a reasonable scenario.  A majority of the 24 S&P groups took on a bullish bias on February 9 and this majority condition is likely to persist into the early days of March.

That said, we continue to believe that the deteriorating medium term indicators will be able to withstand the constructive near term pressures.  So, higher rally highs are at risk of creating more negative divergences.  Moreover, an early March near term peak will likely have negative medium term implications.

We still believe that the trading range from Monday’s high into Thursday’s high was a “B” wave triangle. If so, this clearly defines the overall rally from last Friday’s low an ABC pattern. As such, the current “C” wave will be 1.618 times the “A” near 1100. As mentioned, key resistance is at 1104-1105.

On the downside, our main focus is on tactical support at 1029-1020. However, the aforementioned “B” wave triangle is important interim support. In that regard, a breach of 1057 would be viewed as a breakdown and do much to indicate the demise of the current rally.

Short Term Review

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Stocks: Even if a rally through 1104-1105 were to occur, we do not believe that would change the big picture outlook as described in our January “Year Ahead” piece. We continue to believe that a challenge of the January high would result in more numerous and more important negative divergences than those that already exist. It would be a condition not unlike the divergences that appeared in October 2007 as the market penetrated the July 2007 high.

10-Year Yields: In recent days, yields have rallied through near term resistance at 3.71% and have pierced (at least temporarily) the downtrend line from the December peak. However, a case can be made that this rally is a “C” wave within an ABC rally pattern from the late January low at 3.58%. As such, this rally has only retraced a normal 50%-61.8% of the December-January decline. So, at this point, it is “no harm, no foul.”

US Dollar: The Elliott and momentum evidence suggests that a near term pullback will likely be a pause within the dollar’s current rally trend. However, a more important top may not occur until the intermediate pressures begin to build in March-April.

Commodities: From an Elliott wave perspective, g July lows represent the end of a fourth wave triangle so a reversal would bolster our view that the minimum requirements for a complete multi-year five-wave pattern had been satisfied. From a non-Elliott perspective, the breach of the post-July uptrend line would imply larger uptrends from April 2009 and possibly from late 2006 had also been reversed. All of this raises the prospects that the decline from last December’s high is the opening salvo in a cyclical decline.

S&P 500 Hourly

Signs of Distribution

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On Thursday, the S&P 500 gained 1.0%. Breadth was positive by a bit less than a 6:1 ratio while up volume outpaced down volume by better than 3:1. Total volume was marginally better than Wednesday’s turnover, but remains well below its 21-day ma. The daily Coppock Curve has a bullish bias for 30 of the 24 S&P industry groups.

S&P with Volume Momentum

In yesterday’s post we said that, while there were mixed signals, we were inclined to look for a bounce rather than a decline. We felt – and still feel – that the corrective rally from last week’s low did not appear to be finished. It is not unreasonable to count the trading range from Monday’s high into Thursday’s high as a “B” wave triangle. If so, this clearly defines the overall rally from last Friday’s low an ABC pattern, with Thursday’s rally viewed as the beginning to the “C” wave. As such, this “C” wave would find Fibonacci and chart resistance in the 1085-1090 area, with second resistance indicated near 1100. Key resistance is at 1104-1105; a rally through that benchmark would do much to lock in the decline from the January 19 peak as a corrective pattern.

On the downside, our main focus is on tactical support at 1029-1020. However, the aforementioned “B” wave triangle is important interim support. In that regard, a breach of 1057 would be viewed as a breakdown and do much to indicate the demise of the current rally.

With all that in mind, volume has lagged badly in recent weeks. Indeed, just as this rally of recent days was beginning to gain some footing, our measure of volume momentum was at levels not seen since March. This followed a distinct negative volume divergence at January’s peak. This divergence, followed by a breakdown to multi-month lows, is viewed as a clear sign of distribution. Given our concerns related to sentiment and intermediate momentum, these volume pressures are further evidence that the recent low near important Fibonacci support at 1043 will be breached in coming weeks.

A Coin Toss

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On Wednesday, the S&P 500 fell 0.2%. Breadth was negative by a 4:3 ratio and down volume outpaced up volume by a 5:4 margin. However, total volume fell by 17% and dropped below its 21-day ma. The daily Coppock Curve has a bullish bias for 20 of the 24 S&P industry groups.

S&P 500 Hourly

Mixed signals abound. On the one hand, near term momentum has a bullish bias as evidenced by the daily Coppock Curve and the 10-day CBOE put/call ratio is oversold. On the other hand, the decline from the January 19 peak is essentially impulsive even as the “rally”: from last Friday’s low is corrective (counter trend) and is bumping up against important downtrend lines. So, in a sense, it is a bit of a flip of a coin as to whether the rally of recent days has more life left in it or whether the January-February downtrend is ready to reassert its dominance. If nothing else, recent action has clearly confirmed the importance of support near our minimum objective of 1043.

All that said, we are inclined to look for a bit of a bounce before the downtrend resumes. While the rally is corrective, it does not appear to be finished. We can make the case that the rally is actually a “C” wave or even a fourth wave. Regardless, it appears to be an ABCDE structure and the final “E” is not complete. A move to or through the hourly downtrend line is still possible.

Whether or not that proves to be the case, we continue to believe that the intermediate pressures will be able to withstand any nearby strength. Thus, whether the current rally lasts for another day or another week, lower lows are likely to follow.

Our resistance focus in the period immediately ahead is still on 1104-1105. A rally through that benchmark would do much to lock in the decline from the January 19 peak as a corrective pattern. However, even if a rally through 1104-1105 were to occur, we do not believe that would change the big picture.

On the downside, our main focus is on tactical support at 1029-1020. Since last week’s low was a minimum 38.2% retrace of the July-January rally and since we do not think that last week’s low was the low, it seems reasonable to expect the S&P to take the next step and retrace at least 50% of the July-January rally. That would imply further weakness toward 1010. That would be more than enough to decisively violate tactical support and lock in the entire rally from March’s low as a complete pattern.

R&R

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On Tuesday, the S&P 500 more than made up for Monday’s 0.9% setback with a rally of 1.3%. Internally, breadth was positive by 11:2 and the up/down volume ratio was positive by almost 5:1. Tuesday’s rally was bolstered by a 23% increase in total volume. Finally, the daily Coppock Curve has a bullish bias for 16 of the 24 S&P industry groups; this indicates that a near term bottom is in place.

S&P 1500 BPI and A-D Line

The improving nature of the daily Coppock Curve, together with the current oversold condition suggests that the S&P needs some R&R (rest and relaxation), which suggests the potential for further upside. However, the intermediate trends are still under pressure. The post-January downtrend still has an impulsive look to it (subject to the S&P’s ability to hold below 1104-1105), the weekly Coppock oscillator is likely to have a bearish bias through most – if not all – of March, the Bullish Percentage Index (BPI) is well below its 21-day ma, and almost two-thirds of the stocks in the S&P 1500 Supercomposite are at least 10% below their respective 52-week high (and almost one-quarter are at least 20% below their 52-week high). All of this suggests that the intermediate downtrend will be able to withstand the impact of a near term rally. Thus, we expect that, once any near term strength runs its course, the intermediate pressures will reassert themselves and carry the indexes to new reaction lows.

Our resistance focus in the period immediately ahead is on 1104-1105. A rally through that benchmark would do much to lock in the decline from the January 19 peak as a corrective pattern. However, even if a rally through 1104-1105 were to occur, we do not believe that would change the big picture. We continue to believe that a challenge of the January high would result in more numerous and more important negative divergences than those that already exist. It would be a condition not unlike the divergences that appeared in October 2007 as the market penetrated the July 2007 high.

On the downside, our main focus is on tactical support at 1029-1020. Since last week’s low was a minimum 38.2% retrace of the July-January rally and since we do not think that last week’s low was the low, it seems reasonable to expect the S&P to take the next step and retrace at least 50% of the July-January rally. That would imply further weakness toward 1010. That would be more than enough to decisively violate tactical support and lock in the entire rally from March’s low as a complete pattern.

Short Term Review

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Below is the "Plain English" summary from the first page of the report.

Stocks: Our main focus is on tactical support at 1029-1020. Since last week’s low was a minimum objective and since we do not think that last week’s low was the low, it seems reasonable to expect the S&P to take the next step and retrace at least 50% of the July-January rally. That would imply further weakness toward 1010. That would be more than enough to decisively violate tactical support and lock in the entire rally from March’s low as a complete pattern.

10-Year Yields: In previous comments we had mentioned that the decline in 10-year yields since late December had locked in the November-December rally as a complete pattern that. Continued weakness has upped the ante a bit because we can now say that the larger rally that began in October has been reversed.

US Dollar: Given its weighting in the dollar index, it is not surprising that our outlook for the euro is essentially the opposite of that for the dollar. Virtually everything that is bullish for the greenback is negative for the euro. If, anything, the euro’s weakness is more apparent than the dollar’s strength. We say that because the euro has retraced almost 61.8% of its March-November decline, the dollar index has only retraced a bit more than 38.2% of its March-November rally.

Commodities: Oil is now in a confirmed downtrend. The decline from January’s high is impulsive and is deep enough to lock in the December-January rally as a complete pattern. While the uptrend from the December 2008 low just above 31 is still intact, oil is now in the middle of the key 73-69 support range

The Cork’s Out of the Bottle

February’s monthly Insights was released to subscribers Tuesday evening. Readers interested in becoming a subscriber should send an e-mail to either walter@wminsights.com or customerservice@wminsights.com. We are also on Twitter as waltergmurphy.

We are considering hosting a webinar/conference call later this month. It would be about an hour, would be limited to 30 participants (with priority to subscribers), and would include both charts and Q&A. The cost would likely be in the $30 area. Please send expressions of serious interest (with no commitment) to walter@wminsights.com.

On Thursday, the S&P 500 had its toughest day since April with a loss of 3.1%. Internally, breadth was negative by better than 24:1 and the up/down volume ratio was negative by 32:1. To top it off, total volume increased by 37%. The daily Coppock Curve is still negative for 22 of the 24 S&P industry groups. To call Thursday a distribution day or a 9:1 day does not do it justice. The cork is out of the bottle.

S&P 500 Hourly

In addition to the internals described above, Thursday’s decline occurred on five waves on the hourly chart. Indeed, we will have to see how the S&P handles the fifth wave in that sequence, because it could turn out to be a lower degree third wave (i.e., a third of a third). Regardless, the move to new lows in an impulsive fashion suggests that the index has begun a second leg from the January high.

At this point it is largely irrelevant as to whether we call this second downleg a “C” wave or a third wave. Either way it should be at least equal to the decline from January’s high into last week’s low. Indeed, since third waves and “C” waves both tend to be fairly powerful, we should not be surprised if this new decline is 1.618 times the earlier first or “A” wave.

On the daily chart, equality suggests an objective of 1044; the 1.618 multiple implies a test of 1030. Readers may find those numbers intriguing. In earlier posts we said that we expected a move to at least 1043 (i.e., a 38.2% retrace of the July-January rally) and, if that level was exceeded, the door would then be open for a challenge of tactical support at 1029-1020. (For what it is worth, the objectives derived from the daily chart are a bit more conservative than those derived from the hourly chart.)

As for resistance, the rally to 1105 earlier this week provides a new reference point. An immediate rally back through that level would lock in the entire decline from the January high as a corrective pattern. However, if yesterday’s decline is the first leg of a larger pattern, which appears likely, then nearby oversold rally attempts may not make it past 1079-1089.

Near Term Improvement, But …

February’s monthly Insights was released to subscribers Tuesday evening. Readers interested in becoming a subscriber should send an e-mail to either walter@wminsights.com or customerservice@wminsights.com. We are also on Twitter as waltergmurphy.

We are considering hosting a webinar/conference call later this month. It would be about an hour, would be limited to 30 participants (with priority to subscribers), and would include both charts and Q&A. The cost would likely be in the $30 area. Please send expressions of serious interest (with no commitment) to walter@wminsights.com.

On Wednesday, the S&P 500 fell 0.6%. Breadth was negative by a 5:2 margin and down volume exceeded up volume by almost 3:1. However, total volume fell by almost 11% from Tuesday’s level.

S&P 500 with Daily Coppock Curve

The daily Coppock Curve still has a bearish bias for 19 of the 24 S&P industry groups, but these pressures may not last much longer. By our reckoning a solid majority of the groups could take on a bullish Coppock bias by as early as Thursday (tomorrow). As such, we would not be surprised if those new constructive underpinnings persisted for 2-3 weeks (which is pretty typical for a near term trend). However, the weekly oscillators are firmly entrenched in downtrends and appear able to withstand any near term strength. As such, the risk is that near term surprises will be to the downside.

That said, we are still in the camp that the decline from the January 19 high is impulsive on the hourly chart. So, while the daily chart does have a corrective hue to it, we are inclined to count the choppiness toward the end of the last week as an “irregular” bottom. In “Plain English” that simply means that the actual low last Friday is part of a corrective process that actually began a few days earlier. Subscribers will note that we used a similar formation in the recent monthly Insights when comparing the November 2008 low to the March 2009 bottom.

Despite this week’s rally, the “500” has barely managed to struggle to first resistance. In Monday’s post we noted that this countertrend rally should be a Fibonacci relationship to the just completed decline. A 38.2% retracement is in line with the fourth wave of prior degree, so 1102-1103 is a reasonably important first resistance area; the S&P rallied to 1105 before pulling back. Second resistance is in the 1111-1120 area. Obviously, a rally back through 1150 would send us back to our pencil and ruler.

We continue to believe that the decline from January’s high will be at least a 38.2% retracement of the July-January rally. This suggests further weakness to 1043, intervening rallies notwithstanding. Such a move could well put tactical support at 1029-1020 under pressure.

February's Monthly

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Below, is our Plain English summary from the first page of the monthly. The charts are worthwhile!!

Stocks: We can say with confidence that the rally from the July lows has been reversed. Thus, our immediate focus will be on chart and Fibonacci support levels related to the July-January advance. But as the new downtrend develops, and especially if it begins to move below 1043, we will begin to focus more on tactical support and the potential for a confirmed resumption of the primary bear trend.

10-Year Yields: A breach of 3.175%-3.201% would invalidate three bullish formations and set the stage for still lower yields. Thus, we view that range as tactical support.

US Dollar: Conventional wisdom is that expectations toward the dollar are responsible for the movements in commodities. Our take is that the dollar is but one player in a broad-based cyclical change in trends.

Commodities: The Continuous Commodity Index had a five wave decline in 2008, followed by a counter-trend 61.8% retracement rally. This combination suggests that the CCI is positioned to test its 2008 low. To put that into perspective, the index is currently at 465; the 2008 low was 322. However, there are still a few missing ingredients for such a decline.

Countertrend Rally

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February’s monthly Insights should be released Tuesday (Wednesday at the latest). Readers interested in becoming a subscriber should send an e-mail to either walter@wminsights.com or customerservice@wminsights.com.

We are considering hosting a webinar/conference call later this month. It would be about an hour, would be limited to 30 participants (with priority to subscribers), and would include both charts and Q&A. The cost would likely be in the $30 area. Please send expressions of serious interest (with no commitment) to walter@wminsights.com.


S&P Hourly

On Monday, the S&P 500 had its best day since the first trading session of the year with a rally of 1.4%. Breadth was positive by 9:2 and up volume outpaced down volume by a 17:2 ratio. However, total volume fell by over 27% from Friday’s level.

The lower volume, which puts a bit of a damper on Monday, continues January’s propensity for lower volume on rallies and higher volume on declines. During January, the S&P rallied 11 times and fell eight times. Volume was lower for seven of the 11 rally days, while seven of the eight down days were accompanied by higher volume. Thus, despite the strong start to the year, the overall bias has been to distribution, not accumulation.

That said, near term momentum is oversold and there has been evidence of positive divergences. For example, the daily Coppock Curve is still weak for 21 of the 24 S&P industry groups, but this compares with 22 late last week and all 24 early last week. Moreover, it is our expectation that a majority of the groups will have a bullish near term momentum bias by the end of this week.

This combination of oversold and diverging momentum suggests that Monday’s rally could continue for a while, perhaps for much of February. The oversold 10-day CBOE put/call ratio buttresses the idea of further near term strength. However, we continue to count January’s decline as a five-wave pattern, meaning that it is the first leg of a larger decline. Moreover, the intermediate indicators are weak enough that they should be able to withstand a near term rally. Thus, the risk is that surprises are more likely to be to the downside.

Our basic view is that Monday’s rally is part of a wave 2 or a wave “B” within a larger unfinished downtrend. As such, this countertrend rally should be a Fibonacci relationship to the just completes wave 1/A. There are several ways to count the five wave pattern, but a 38.2% retracement is in line with the fourth wave of prior degree, so 1102-1103 is a reasonably important first resistance area. Beyond that we would look to 1111-1120.

We continue to believe that the decline from January’s high will be at least a 38.2% retracement of the July-January rally. This suggests further weakness to 1043, intervening rallies notwithstanding. Such a move could well put tactical support at 1029-1020 under pressure.