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.