The Dow Transports managed another all-time high this past week (Chart 1), after the SP500 advance-decline line had done the same the week prior (Chart 2). These developments are consistent with the scenario of a new high in broader stock market indexes. Chart 3 updates our ending diagonal triangle scenario in SP500.
SP500 fell swiftly from an earnings-driven exhaustion surge in overnight futures Friday morning. The current decline is likely a corrective pullback, which has already sending many indexes to their near term support. The coming Monday sees a window for a potential near term low.
In terms of wave counts, the current decline in stocks counts best as a wave B or a wave 4. The sell-off is so far a corrective three-wave structure. See Chart 4.
At the same time, indexes are approaching potential near term support. Consider the following.
[a] SP500 is retesting its 50-day moving average of 1858. The index closed at 1863 Friday. See Chart 3 above.
[b] SP500 has now retraced a fib-0.382 of its advance since the April 15th low. See Chart 4 above.
[c] To the extent that an inverse head-and-shoulders pattern is developing, SP500 is now in a zone where the right shoulder is likely to bottom. See Chart 4 above. Note that the size of the IHS is about 60 index points, which hints at a respectful overthrow when SP500 does breakout to the upside.
[d] The Dow Transports are retesting its breakout trend line, which may turn into a near term support on a successful retest. See Chart 1 above.
Last but not least, it’s prudent to keep in mind that on the bearish side
[a] Friday’s high would be interpreted as the top of wave 2 or wave B based on the bearish count.
[b] There is an unfilled gap around 1845 in SP500.
