“If, however, as it is the case today, we are tracking an exceptionally strong counter-trend rally, we can assign a more liberal count to the trend and, in that case, we come up with 2058, 2070, and perhaps even 2080 before we reach a reversal point.”
Last week, SPX reached a high of 2056.60 and had its best (minor, so far) pull-back since the 2009 high of 3/04. The high is close enough to the 2058 projection mentioned in last week’s letter to take notice, especially if the initial decline of 34 points continues down to its potential short-term target of about 2002. Incidentally, the 34-point retraction was equivalent to a .382 retracement of the phase which started at 1970 on 3/10. Do we now extend the rally from 1810, or do we continue to decline to the full projection of 2002 — which would amount to a .618 retracement? The 2002 projection was based on the amount of distribution which occurred above the 2041 level.
If the index did continue to sell-off to that level, it would increase the probability (above 50%) that the rally phase from 1810 did end at last week’s high, but we should not expect much more downside at this time. As we did after the 2116 top of 11/03/15, a period of volatility between 2000 and 2056 could take place which would create the amount of distribution needed to extend the primary bearish trend. This is speculation about what could
take place over the next few weeks if 2056 turns out to be the rally top; it is not a forecast. First, next week’s market action needs to confirm that a top has been made. Let’s see what happens!
SPX Chart Analysis
Daily chart (This chart, and others below, are courtesy of QCharts.com.)
As I stated above, there is a good chance that last week we witnessed the high point of the rally from 1810. Why is that? Let’s start with the chart. I have already mentioned the similarity between the rally from the September low and the one from the February low. They are both wedges, a bearish pattern which is well suited for a countertrend rally. They are also about the same length in time, with the current one being a few days longer than the last one. But there is more than similarity between them in the length of each uptrend: within a few pennies, they span exactly 244 points! Because of that, we can draw a channel (heavy red lines) which contains the present correction and runs at a slightly lesser angle than the top trend line. This is important 1) because it indicates deceleration within the longer-term trend, and 2) because if, after a brief consolidation, the rally should extend outside of that channel, it would be the first indication that the large pattern between August ’15 and February ’16 might only have been a consolidation in the long-term uptrend. For this reason, what the index does over the next few weeks will be very important.
