Jill asks: “Now that the S&P has opened higher and continued up this morning, what are your thoughts?”
In the longer-term, the strong, bullish conviction-close (daily chart) above 894 in the S&P (basis cash) nudges me in this direction: that the US Stock Market should see a repeat of the 1966 to 1982 pattern.
One point though, the 12-month swing (yearly trend) buy signal will occur only a bullish conviction-close on a monthly basis; and, it’s only the start of the month. Anything can happen between now and May 31. So we need a daily benchmark.
This benchmark will be a breach of the 18-day swing high (monthly trend) at 946.9. This will confirm that the 18-d downtrend is no longer in force. Figure 1 shows the swing high. I have made invisible the candlesticks so you can better view the pattern.
How to trade it now with this possible change in strategy?
- I’d wait for a breach of 947.
- I’d wait for an 18-day swing correction. While the 18-d swing impulse move is not overextended, I am unwilling to buy this rally without seeing this correction. Point 5 provides my reasoning.
- If we see a breach of 947 by a small amount and then a pullback, you may be seeing the formation of a Head and Shoulders right bottom on the 18-day. The left shoulder registered 741 and since Head and Shoulder patterns are relatively symmetrical, this would be my first guess for a retracement level.
- If the S&P breaks above 1000 without an 18-d retracement, the scenario in (3) is probably invalidated. We still may see a Head & Shoulders but with the sloping neckline, the right shoulder tends to form above the left.
- The key indicator of whether we may have seen a 12-month low at 666.80 will lie with the quality of the next 18-d down move. An up and down move comparison of the average range and volume per bar will usually disclose the nature of the leg down. If the leg down is not corrective, we may still be in a 1929 to 1942 type scenario. In that case, I’d have to see May’s monthly close to come to a tentative conclusion.
In summary:
- I lean to the 1966 to 1982 scenario (despite my bearishness based on my understanding of the fundamentals).
- I am looking for a breach of 946.9 to confirm that the 18-day down trend is over.
- I am looking also for an 18-day correction to provide a confirmation that the down trend is over.
FIGURE 1 18-day S&P
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