The S&P 500 index rebounded from early losses to close slightly lower today, holding below recent highs of the rally from October 2011 and beginning another test of uptrend support. Technical indicators are slightly bullish overall on the daily chart, tentatively favoring a continuation of the advance. However, the rally from October is extremely overextended on an intermediate-term basis and it will almost certainly be followed by a violent overbought correction.
With respect to cycle analysis, the cycle high setup that occurred yesterday remains in effect and a close below 1,392 during the next session would generate a confirmed cycle high signal, indicating that the Beta High (NYSE:BH) of the current short-term cycle likely formed on March 26. Given the short duration of the moves during the last two weeks, it is also possible that the alpha phase rally is still in progress, in which case a confirmed cycle high signal would indicate that the Alpha High (AH) likely formed on March 26.
The rally off of the last Intermediate-Term Cycle Low (ITCL) in November 2011 has now advanced for 18 weeks without experiencing a meaningful retracement. Again, this move is extremely overextended and the forthcoming overbought correction will likely be violent in character. The Intermediate-Term Cycle High (ITCH) is imminent and the cycle high setup that occurred last week remains in effect.
The deterioration in market internals that we first noted at the beginning of the month continues to suggest that the rally is losing underlying strength. Both breadth and volume have returned to support at the lower boundaries of their respective uptrends from last summer.
It is important to note that weakening internals do not necessarily signal an imminent reversal in prices. Markets often continue to rise while breadth and volume are weakening, as the stock market did during March and April of last year. However, this deterioration is a warning sign that suggests the overextended rally has become vulnerable to an overbought retracement. The stock market "wants" to correct; it is simply awaiting a catalyst to set the decline in motion. The character of the developing short-term cycle will provide the next signal with respect to long-term direction, so it will be important to monitor market behavior closely during the next two weeks. We will identify the key developments as they occur in our daily market forecasts and signal notifications available to subscribers.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.