Wednesday, July 7, 2010

Follow-Through Day

Yesterday I said: "That could change with a strong one day rally that closes well above today's high as the fledgling pattern could morph into an impulse. It really does depend on tomorrow's action...At least we have a setup now for a follow-through day. A 1.7% rally tomorrow or later on higher volume than the day before will qualify".

Well, we got both a strong one day rally that closed well above yesterday's high on higher volume and a follow-through day. We are now about two days away from a positive divergence MACD buy signal. Given that this will be the 3rd follow-through and the 2nd MACD buy signal since the April high, the market should be able to carry into the mid to late August time frame before the next possible high. This assumes, of course, that we do not break down directly tomorrow after the unemployment claims number comes out.

I believe I said about two weeks ago that shorting a breakdown below the February lows would be dangerous. Now you know why. If we are to see a major intermediate term sell-off, it should come after the next high in August. That is now 5 to 7 weeks away.

The 61.8% retracement of the entire decline from the April high for the SP500 is around 1140. If the SP500 can make it back above 1131, the June 21 high, to 1140 or higher, it will confirm that the decline so far is a 7 wave correction, which will mean that regardless whether the correction continues, we will see the cyclical bull market move to new highs above the April highs. We are still weeks away from this possible outcome, but keep a lookout because this could very well rout the bearish case into 2011 or even 2012.

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