The Cork’s Out of the Bottle

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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.