Posted by Danny on May 9, 2016
Stocks have started a long awaited pullback. The bearish divergences we mentioned a few weeks ago have finally taken their toll on the market rally. Now the question becomes how deep the pullback will be and when it will end.Let’s have a look at the S&P 500 chart.
The S&P has lost about 50 points since its April highs. That’s still a very mild pullback given the size of the rally that preceded it. But it has been enough to pull the Earl indicator into bottom territory and ready to turn up again. That lines up nicely with the LT wave for May, which suggests a strong period over the coming 10 days, so a rebound may start sooner rather than later. The slower Earl2 (orange line) is still headed lower, so if we get a bounce in the next week or two it will probably be followed by a second leg down.
My current base scenario is for a rally attempt that may go as high as 2100, but probably no new high for the year. Another pullback in late May or June would create a good setup going into summer. But we will first see what happens.