The S&P 500 index closed sharply higher today, moving up to a new high for the uptrend from early October and breaking above strong resistance at the congestion zone in the 1,260 area. The rally also moved above the 200-day moving average near 1,274, which transformed from strong support into equally strong resistance following the violent breakdown in August.
Although technical indicators are bullish overall on the daily chart, the move from early October has advanced at an unsustainable rate, gaining more than 19% during the course of four weeks. Therefore, the short-term uptrend will almost certainly be followed by a violent overbought correction. At a duration of 18 sessions, the alpha phase rally of the current short-term cycle is overdue for a reversal and the Alpha High (AH) could occur at any time during the next few sessions.
After the AH has formed, a brief alpha phase decline of less than six sessions in duration followed by a quick move above the AH would reconfirm right translation and favor additional short-term strength. Alternatively, a failure to move well above the AH during the beta phase rally would suggest that cycle translation is in question and forecast a move down toward recent short-term lows during the beta phase decline.
From a long-term perspective, the developing cyclical bull market breakdown continues to proceed as expected. Although you will soon be reading financial media headlines celebrating the large gain during the month of October, the vast majority of those articles will undoubtedly fail to analyze the rally in its proper context. As we have noted on many occasions during the past two years, the stock market entered a period of heightened long-term volatility when the cyclical downtrend from 2007 accelerated into a true market crash in 2008. Consequently, every trend and countertrend since then has been a violent, extreme move as shown on the following monthly chart.
The October monthly gain may very well prove to be the largest in 24 years, but it is a normal development given the current phase of the secular downtrend from 2000 and certainly not the sign of a healthy market. The stock market continues to track the scenario that our computer models have been monitoring since the cyclical bull market broke down in August. The next assessment of long-term health will be provided by the rally phase of the new annual cycle that began in October with the confirmed formation of the latest Annual Cycle Low (NYSE:ACL).