Last week we talked about the continued short term weakness in the broader markets and how this was likely to continue for a few more weeks (our 9 week cycle). So it was no surprise to us to see Monday mornings gap down creating yet another lower low. Although we have since seen a sharp and fast rise back above 1600 on the S+P 500, a move that tends to be typical during corrections. Despite this move higher I continue to believe this correction phase will last a few more weeks. As neither our price or time targets have been achieved, this leads me to believe there is still some more downside remaining. This week will be a holiday shortened one that concludes with the big Non-Farm Payroll report on Friday morning.
The chart above sets the stage, it is a weekly chart of the Dow Jones Industrial Average dating back to the 2007 bull market high (Red horizontal line). We continue to trade above that key zone and I think this correction will get close to testing this area below before that strong support zone is found.
Let’s drill down a little closer now and look at the S+P 500. This chart above shows the daily trading in the S+P 500 cash index since the May 22nd high. So far we have had two separate drops of 90 points in length. And as of Thursday’s swing high, we now have two separate retracement rallies of about 60 points. As I mentioned in the introduction, this upcoming week is a holiday week so even if there is any low volume “melt up” I still fully expect that rally to fall below the 1654 swing high, somewhere in the vicinity of the yellow zone I have marked on this chart.
After that we can expect another equal sized drop, probably to the bottom rung of this price channel. Monday’s swing low produced a lower low of about 38 points below the previous swing low. Another lower low of equal distance would equate to roughly 1522. So as you can see there is a lot of confluence below that should eventually provide for a strong support zone that will take us to new bull market highs on the major averages. Right now the worst possible scenario I can see is another 130 point drop which would take us closer to the 1500 level on the S+P 500. In either scenario we’ll be making new bull market highs by year’s end. Once we get there we can talk in more detail about what we should expect soon upside targets are reached.
Let’s take a moment to take a look “under the hood”. As we saw last week the cumulative Advance – Decline did confirm with a lower low. We have had a relatively sharp retracement this week but still trade below the last two swing lows.
Examining sector performance since the May 22nd high shows us the strength lies in the Financials, Cyclical and Industrial sectors. While the laggards now become the Materials, Energy and Utilities.
So in conclusion, not a whole lot has changed since last week. We still are in the middle of a short term bear market that thus far shows no signs of letting go. However the Longer term trends will soon come into play which I fully expect to present strong enough support to turn these short term trends around in a hurry.