Points to Ponder

March’s monthly insights has been released and is available to subscribers on our website, www.wminsights.com.  We also hope to make our blog available to all readers in the Comments section of our website in the next day or two.  Readers interested in becoming a subscriber should send an e-mail to walter@wminsights.com. We are also on Twitter at http://twitter.com/waltergmurphy.

Friday’s rally carried the S&P solidly into the 1131-1150 resistance area that we have focused on since the breakout above 1116.  So the real question is, “What’s next?”  There are several points that dominate our thinking.

First, we continue to respect the idea that, while November’s decline can be counted as a reversal of the rally from July’s low, it may have only been a correction within a larger post-July pattern.  If so, then the January-February decline locked in the July-January rally as a complete pattern.  Thus, the line of demarcation is January’s 1150.45 high; a rally through that benchmark will leave us no choice but to count February’s low as the equivalent of a fourth wave within the still unfolding post-March 2009 corrective pattern.  (July’s low was wave 2.)  Moreover, a rally through 1150 will also raise tactical support to 1044, from 1029.

Second, while Friday was a solid day in most respects, it was also a low volume day – again.  Total volume did increase modestly (4%) from Thursday’s level, but it remains solidly below its 21-day ma.  In fact, the 21-day moving average has been declining throughout the entire rally from the March 2009 low.  This is in contrast to the 2007-2009 downtrend, when volume consistently increased throughout the bear market.

S&P 500 with NYSE Composite Volume (21-day ma)

Third, absent a solid week this week, we expect that near term momentum will turn down in harmony with a still weak medium term oscillator.

Fourth, the backing and filling in the middle of last week looks very much like a triangle.  Conventional triangles are continuation patterns and are also penultimate structures.  This combination suggests that Friday’s rally is the final surge from the February 25 low.  Combined with the momentum configuration, It would appear that the S&P will soon be in need of a rest.

Fifth, the dominant February-March uptrend line is currently near 1108 and rising by more that three points per day.  (The trend line connecting the July and February lows is near 1068.)

Finally, the overall structure remains corrective.  Virtually every correction over the past 12 months has overlapped the correction that preceded it.  Overlaps are classic signs of a corrective pattern.

All that said, we need to expand the top end of the resistance zone to 1159, from 1150.    The 1150 level represents the January high, so that is an obvious resistance point.  However, the rally from the July low will equal the prior March-June rally at 1158.  Moreover, the rally from the February 25 low will equal the February 5-22 uptrend at 1154.  Finally, on the hourly closing chart, the thrust out of the March 2-4 triangle equal the February 25-March 2 rally into the triangle at 1155.  So it seems pretty clear that a rally through 1159 will be a bullish development.