In my last post I recommended caution and wanted to see how the market gets through the lunar red period. Muddling through without further damage to the longer term uptrend would set us up for another rally in July-August.
That seems to be what we have got and if the market holds up a few more days then another rally will become the base scenario. Here is the current S&P 500 chart:
The 2400 support level has held up well so far. It was tested twice but didn’t break. My Earl indicator (blue line) has bottomed out, which sets the stage for another rally. But the slower Earl2 (orange line) is still headed lower just below the zero line. The MoM indicator is also turning up from the yellow neutral zone.
After an extended bull move it is not unusual for the Earl2 to negate the final rally of the move and just stay flat near the zero line. That could be exactly what we are seeing here. Another rally would probably take this index up to just below 2500 (blue circle) in August and the Earl2 might completely negate that move. If that comes to pass we will have a bearish setup that could be very dangerous for the remainder of the year.
But first things first. The setup favors another rally and we will be starting a new lunar green period. The LT wave will also improve after the middle of the week. If we get the rally I would look for 2500 in August and possibly a major peak. If the rally fails quickly and the S&P drops below 2400 then we will know a bigger decline has already started.
I also want to show you a pattern that is showing up in the S&P since the early 2016 correction lows. The first rally off those lows peaked in August (negating the two day Brexit drops as an aberration) and was followed by a 3 month sideways.
Then the markets rallied 4 months, followed by 6 weeks of sideways action. And then the market rallied another 2 months, now followed by 3 weeks of sideways action (so far).
So, the rallies have been getting shorter and weaker and the sideways patterns that follow them have become shorter as well. The moves seem to halve in length with each iteration. If this self-similar pattern continues for another round then we should now start a 1 month rally with a peak somewhere in mid August. Here is a more close-up chart:
A move well above 2500 or a drop below 2400 would tell us something else is going on. So I wouldn’t bet the bank on this, just keeping my eyes open.
LunaticTrader 