I thought that I would talk a little bit about what I will be looking for tomorrow. Last week, the S&P 500 declined from an intraday high of 1532.43 on Wednesday, May 23 to a low of 1505.18 on Thursday, May 24. That is an intraday decline of 27.25 points. If we use closing prices, the S&P 500 declined from a closing high of 1525.10 on Monday, May 23 to the Thursday close of 1507.51. This is a total decline of 17.59 points on a closing price basis. The rally on Friday took the S&P 500 to an intraday high of 1517.41 and a closing price of 1515.73. Neither one of these perspectives surpassed the 50% retracement mark.
I have expressed my concern about the lack of volume with the downward movement on Thursday, May 24. At the same time, I have expressed ample evidence that the recent rally has become technically weak and vulnerable to a decline back to the 200-day moving average and March lows. The rally on Friday was not enough to change my opinion that an important top has been formed.
In order for me to change my current opinion, I would need to see a retracement beyond the 61.8% retracement level of the thrust down on Thursday. That means I would not begin to become concerned about any upward intraday movement until it surpassed 1522.02 or, more convincingly, above 1526 on the S&P 500. More importantly than that, I would want to see a closing high above 1518.38 or, more convincingly, above 1521. The numbers represent the 61.8% retracement levels, along with the more extreme 76.4% retracement levels. Such significant retracements would exceed those typical of proportional retracements.
It is important to remember that these levels would not represent an invalidation of the analysis that I have been presenting. They would, however, represent a prudent point to step aside from any aggressively bearish positions until a clearer picture becomes evident.
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