S&P 500: Support Stalls Correction

Last week I noted that the breakdown from the ascending wedge pattern should be viewed as a short-term event, but that I believed that we were beginning a medium-term correction. Monday’s decline seemed to confirm my conclusion, but prices soon bounced off support with sufficient vigor to effect a breakout above a short-term declining tops line (see chart below). This skews the evidence in a slightly more positive direction and opens the possibility for a sideways consolidation instead of a further decline.

The internals of the market, as demonstrated by the medium-term breadth and volume indicators below, are still deteriorating, but will be quite oversold in a week or two. Assuming that prices don’t experience a serious breakdown before then, we would have to look for the rally to resume and move on to new highs.

Bottom Line: Our medium-term timing model for the S&P 500 (^GSPC) remains on a buy signal, and it still has some cushion before switching to a sell. My expectations for a medium-term price decline are somewhat abated based upon the short-term breakout that occurred this week, but I think it will take a week or two before we see the situation resolved.

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