Market Overview

With oil deciding to end its decline in climactic fashion on Wednesday, SPX went along for the ride and ended its decline in a similar manner one phase projection lower than I predicted. Since then, it has been in a powerful counter-trend rally which is approaching at least a short-term top. On Friday, the index came to within a few points of its .382 retracement; that is also the proximity of a P&F and Fib projections from the low. After a correction, it is possible that we will have an extension to a higher level before resuming the primary trend, which is down. Should this be necessary, reaching a 50% retracement some 30 points higher would not be unreasonable.

That we are approaching (or at) a short-term high is evident in the deceleration which took place on Friday after the initial opening surge. It is especially apparent on hourly charts of the TRAN, DJIA and XBD (especially).

In the recent weeks, the market has been largely influenced by the declining price of oil. As you know, I had a long term low of “8” for USO (United States Oil Fund). This was finally achieved on Wednesday when it dropped to 7.92 and started to rally immediately, with WTIC doing the same thing. By Friday’s close, it had retraced to 9.27, the best rally since last August. WTIC rallied from its Wednesday low of 27.56 to Friday’s close of 32.25. I will discuss oil in more detail when I analyze USO.

SPX Chart Analysis

Daily chart (All charts courtesy of QCharts.com.)

After almost three weeks of straight decline which spanned 267 points (longer in price and much longer in time than the August sell-off) SPX decided it was enough (for now) and started a sharp rally which, so far, measures 90 points. If we don’t count Wednesday’s reversal, Monday will be its third day. Very often, after three days of trading in one direction, a correction begins (some sort of Fibonacci thing, I suppose). What is not visible on this chart (but will be when we look at the hourly chart) is that a lot of deceleration occurred on Friday, making this phenomenon likely. Also, as mentioned above, we are within a few points of retracing .382 of the decline from 2082 — another reason to expect a correction to start on Monday. We’ll have to see if it is, in fact, a correction or the resumption of the primary trend. Even if we fail to go higher, we could remain in this area for a few days, making a distribution pattern in preparation for the next decline. If only a correction, we would be completing wave “a” of an a-b-c pattern, most likely starting “b” on Monday. Since most analysts agree that we have started a bear market, I would limit myself to these options concerning market behavior over the next week or ten days instead of expecting last week’s action to be the completion of a large corrective pattern from the 2135 top with the prospect of a resumption of the long-term uptrend.