Testing The High

Last week, I mentioned that when it reached 2300, SPX had reached its most likely projection taken at the 1810 base. I also mentioned that it would be normal for a distribution pattern to form before a correction got under way. I believe that this is what the index is currently doing, along with re-testing the high. If, in the process, we should surpass it by a few points, that too would be normal. And finally, if we are in a super strong bull market, we could simply consolidate in a broad price range before moving higher, and if we are not able to retrace below 2230, this is most likely what we are doing.  

That is not the preferred scenario. The favored trend over the next few weeks would be a retracement of at least 100 points, and perhaps more.  This would be consistent with the market’s historical patterns. Even the staunchest bulls would concede that, considering the market’s long-term overbought condition, such a correction would not be unusual, and perhaps even healthy.  Nevertheless, until a correction does take place, there is no certainty that it will.  

The cyclical structure does favor such a scenario. Intermediate cycles are projecting a low in April/May. But, according to Erik Hadik, long-term cycles have been laying the groundwork for a more substantial decline than just a hundred points.  We’ll see.

Analysis (This chart and others below, are courtesy of QCharts.com.)

Daily chart  

The biggest surprise that the market could have in store for us would be to keep on rising and go through the red trend line which has stopped every rally since April of last year. After touching 2300 last week, the index pulled back immediately, dropping thirty-three points in two days, but refused to go lower — ostensibly waiting for last Friday’s job report. Its positive nature fostered a rally which came within two points of the high in the first hour and a half of trading.  After that, it meandered in a small range for the rest of the session and closed at 2297, near its high of the day. There was a drop of two points in the futures immediately after the close, but this may only be a cautious move by some traders in case more pyrotechnics should come from the White House over the weekend, and not an indication of weakness coming at Monday’s opening.