In last week’s update post we talked about the confluence of short term support near the 1900 level on the S+P 500 and a projected downside target of 1908 was given. That proved to be correct as the S+P 500 put in a low this week of 1904.78 and then proceeded to finish the week with a rally over one percent on Friday.
The daily chart above shows how the S+P 500 has now matched the 83 point pullback experienced in April. And I believe now that the risk-reward (at least in the short term) favors the long side for the time being.
Along with the confluence of support in the S+P 500, the Dow Jones Industrial Average ran into it’s own support, that being in the form of it’s 200 day moving average (as depicted in the chart above). I believe the confluence of these key technical levels makes the probabilities favor at least a larger retracement rally.
Just how much we should expect? Well I think a first logical target between 1950 and 1960 is most probable. I have included the above chart to explain a little about why I feel this is so. The chart above happens to be a 15 minute chart that highlights this specific pullback. So far we have seen two separate but equal 17 point retraces and two separate but equal 27 point retraces (where we find ourselves now).
Because of the confluence of support that we have mentioned, I believe this retracement will exceed that of the previous ones. A retracement double the size of the previous (or 54 points) is certainly possible. In this case we add 54 points to the swing low this week and we get 1958 as an upside target. This happens to coincide with the 61.8% retracement level of this most current pullback, along with the 50 day moving average.
I must stress that this is only an educated guess, the Intermediate and Long term trends remain bullish so we must give it the benefit of the doubt. The short term trend remains bearish below 1960. Only time will tell if this pullback turns into something more.
Another thing worth watching will be the S+P 500 advance – decline line. We would like to see any retracement rally in the major averages be accompanied by a rally that takes this market internal reading back above it’s 50 day moving average as well.