Thoughts for Thursday, June 6...

I was quite outspoken about the possibility of a top around 1525. You can find my arguments for that level in most of my posts through late May. When the S&P 500 closed above 1525 on May 30, it seemed most prudent to look for the next potential resistance areas. That analysis yielded the numbers of 1582- 1585. These numbers seemed optimistic, but they were the result of sound methodology.

As it turns out, the markets only rallied for three more days before beginning their decline on Tuesday, June 4. This created an ambiguous wave pattern that fell far short of the next proportional level of resistance. What is certain is that in three days the S&P 500 wiped out price gains dating back to May 10. Perhaps the most convincing aspect of this decline can be found in the fact that 89% of the issues on the NYSE were declining and 93% of the volume on Thursday was on declining issues. This has very negative connotations.

Furthermore, the price decline on Thursday took the S&P 500 below the upper trendline of the trend channel that I have discussed previously. Should we remain below this level after the close on Friday, then that would suggest that we have begun a move downward that will penetrate the lower line of this trend channel by a margin equal to the amount that the upper line was exceeded. I discussed this point more fully in my post on May 22.

If we make an effort to keep our interpretation of the recent price fluctuations as simple as possible, then we would have to assume that the rally up from mid-March is complete. We have a complete five-wave pattern on the weekly line chart. We have a throw-over with a subsequent breakdown. We have some impressive negative volume to accompany this downward price movement. I think we must accept that this could lead to a decline to between 1375 and 1400.

The more bullish interpretation would be that the downward movement that began on Tuesday of this week is merely Wave C of an expanded flat corrective pattern that began with the highs around 1522- 1525 on May 21. I would really need to see the S&P 500 rally back above that upper trend-line in rapid fashion for me to adopt this particular interpretation.