The S&P is now at an important juncture. Since the sell signal in May 08, the question for me was always whether the US Stock Market would follow 1966 to 1982 and form a 12-month sideways market or whether we would form a full fledged bear market akin to the 1929 to 1942.
Figure 1 shows the two possibilities. Technically I have been neutral; fundamentally I have leaned to the bear side.
The rally over the past three days has brought the S&P to possible decision-making threshold. There have been bullish & bearish indications.
The most important of the bullish clues has been the volume. The normalised volume chart in Figure 2 shows that the rally produced volume at mean + standard deviations level. Since this is normalised volume, it is unaffected by roll-over volume, so we can say that the volume has been in keeping with an impulse move rather than a corrective leg.
Since the volume on the way up was so high, I would reduce the significance of its declining volume as the move progressed.
On the bearish side, was the fact that the rally produced only two strong directional days. The other two days were pauses. This is characteristic of bear market rallies.
We have two tools to heal determine the line of least resistance:
Levels:
- Ideally the best level for the market to turn down would be around current prices. But given the volume generated, it is unlikely this will be the case. If the market is going to turn here, the likelihood is a move down followed by a retest.
- The most likely target for the down move to begin would be the 777 to 775 area. This is within a statistical price correction window, the 12-M Primary Buy Zone and some ratio resistance areas.
- The next area of resistance is 798 to 805.
- Any close above 847 would negate the 1929 type scenario, at least for the short-term.
Figure 2 shows the levels, all figures basis S&P cash.
Price Action (Volume and Range) on the Next Leg Down:
Even if we were rhyming with the 1966 to 1982 pattern, I expect to see a retest of March 9 lows (666 S&P cash, 6470 DJIA cash).
Figure 3 shows that in the 1974 breach of the 1970 lows at 624.7 on October 4 was retested on December 9 1970. The re-test is a common theme at bear-market lows.
The volume and range on the way down will indicate whether or not a new bear impulse leg has begun. I’d expect to see at least average impulse range and volume on this down leg to say that the bear has resumed.
Finally, the bears will still have to face the possibility of an April rally. Seasonally this has produced strong up turns prior to the ‘Sell in May and Go Away’ seasonal tendency.
So, the next few days would be key. I’d be willing to place a reduced size position if we see a directional move down tonight. On the other hand, if I see an up gap-open not being filled after the hour’s trading, I’d be exiting some of my final thirds.
FIGURE 1 DJIA 1885 to 2008
Figure 2 S&P Resistance Levels
Figure 3 DJIA 1974
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