Thoughts for Thursday, May 1...

The S&P 500 is finally showing some signs that the recent rally is drawing to a close. I have previously expressed my skepticism about the strength of this rally. Those feelings have not changed, though it has required a bit of patience to wait for things to unfold. Nevertheless, there is some evidence that the underlying momentum of this rally is failing.

If we look at the chart below, we can see the 10-day Relative Strength Index for the daily chart of the S&P 500. The high set on April 28 for the S&P was accompanied by a peak of 84 on the RSI. This is a decidedly overbought level. Sometimes overbought levels mark the end of a move, but often times it is worth while to wait for a divergence to occur. Such a divergence began to appear today when the S&P 500 rallied to a new high, but the RSI did not. This failure to confirm the rally suggests that a possible price reversal lies ahead. Should we see the S&P 500 rally on Friday without a corresponding increase in this short-term RSI indicator, then my bearishness would increase.

I find this intesting to see a divergence beginning to occur at these levels, because the S&P 500 is beginning to reach several levels of potential resistance. One of these levels can be derived from the length of the initial wave formation up. This wave began with the closing low of 1276.60 on March 17 and ended with the closing high of 1372.54 on April 7. That gave the completed wave a length of 95.94 points.

The Elliott Wave Principle tells us that Wave C of a structure tends to assume an equal or proportional length to that of Wave A. Let us assume that the March 17 to April 7 rally was Wave A. Let us also assume that Wave C began with the closing low of 1328.32 on April 14. If Wave C were to rally 95.94 points then, that would put the S&P 500 at 1424.26. Interestingly enough, we are almost at a period when the duration of the rally from April 14 is also equal to the duration of that March 17 to April 7 rally.

So... I did not discuss breadth in this post, but it remains terrible. We have a potential momentum divergence in the RSI. We also have a considerable amount of resistance around the 1420-1425 level on the S&P 500. It could be that a rally on Friday just might be what the S&P 500 needs to place itself in position for a reversal.