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.