We’ve got ourselves a rocket-propelled uptrend! In nine daily trading sessions, the SPX has tacked on 149 points, or almost a 14% gain. You’d think that we had started a new bull market but, considering the major cycle lows that lie ahead, that’s highly unlikely, and we are probably only experiencing a very strong rally in a bear market. As anyone who has followed the stock market for a while knows, bear market rallies are supposed to be fast and furious by nature, and this one is taking place in an extremely volatile period, so perhaps we should not be so surprised at its velocity.
In spite of this, we can still make sense of where we are and what is likely to come next. The structure appears to consist of five waves from the 1075 low, with the index now completing its fifth wave. If this is correct, the entire move would be wave A of the upward correction, and we should be on the verge of starting wave B.
The Point & Figure charts seems to support this analysis. The base pattern — including a small extension — gave us a projection to 1171. This is where the rally paused after completing wave 1. Wave 2 formed a re-accumulation pattern which provided a count to 1221, with a possible extension to 1230-1233. Wave 3 stopped at 1220, giving way to a wave 4 correction. When that pattern was completed, we had another projection to 1223 with a possible extension to 1230-1233 (which matched the count across wave 2). Incidentally, there is also a potential base extension count to 1224 which is well defined and which could turn out to be important.
On Friday, the index closed on its high of the day at 1224, intimating that it may not be quite ready to pull back before attempting to meet a final target of 1230-1233. This could happen on Monday morning, and if it does, we should be ready for the beginning of the most serious retracement since the beginning of the move. If the market decides not to go beyond 1224, it will not invalidate the structure or the projection. However, if we go substantially beyond 1233, some adjustment to the analysis will have to be made.
Besides completing the structure and reaching the target, there are several other coincident technical aspects that argue for an important pause in the rally at this time.
– On its way down to 1075, the index made an extended consolidation of several weeks. The top of that consolidation was 1230.71, and any rally to that level should expect to meet with at least temporary resistance, especially since it corresponds with a short-term high in November 2010 and also matches the P&F projection!
– The move from the low of 1075 to 1231 represents a retracement of slightly over 50% of the entire decline from 1370.
– The 200-EDMA of the SPX is currently at 1234. After a move of that extent, it is not likely that the index can shoot through its 200-EDMA without some consolidation.
– As you can imagine, the daily indicators are severely overbought with the MSO at 100%, and the A/D oscillator is in an area from which it normally retraces.
– All the hourly indicators are showing negative divergence.
– The 17-week cycle is expected to make its low next week. The effect of this cycle on the stock market is not consistent, varying from a small ripple to a sizeable move. In this case, if the SPX does top on Monday, it could bring about a significant initial correction.
– Finally, on Friday, my leading indicator started to show some negative divergence to the SPX on an hourly basis. That is only the second time that it has happened from the beginning of the rally. The first was during the wave 2 consolidation.
Taken all together, these are good reasons to expect a pause in the rally.
Let’s look at charts!