Bull Trap for Consumer Confidence

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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.