I often discuss how a major energy level will frequently bend – sometimes dramatically – but by the end of the period the level will have held up. It looks now like the 1060 level
is exerting its influence.
To refresh, the 1060 area is the 38.2% retracement level (a very important Fibonacci number) of the entire drop. I’ve been maintaining all along that the S & P 500 (SPX) was a
virtual lock to make it back up to 1060, as even in an ongoing bear market there would be enough energy embedded within the decline to bounce this high.
Sure enough, the SPX made it to 1060 and beyond with relative ease. The question now is whether equities will be able to sustain this recovery rally beyond this easy target.
I think the answer is a resounding yes. With the leading economic indicators at record highs, there is little chance of the “double dip” recession often cited by bears surprised by
the relentlessness of the rally. Once the Weekly Leading Indicators start flying like this, it is not easily derailed, and such recoveries last at least 12 to 18 months.
But sooner or later, a 38.2% retracement will hit every market trend. If the SPX is undergoing such a move now, then we have to look at the 1020 area as the likely reversal spot.
If the SPX does drop down to 1020, or just beyond, then that should trigger a very energetic bounce up. If the SPX instead bounces more tepidly right now, then there will still be
a danger of further weakness down to 1020 before this corrective period is over.
So in a way it might just be better for the bigger bullish case to see the SPX drop immediately down to 1020, and get this required 38.2% retracement behind it, so the recovery
rally can quickly resume from there.
Jeffrey A. Green
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Branch Manager
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Houston, TX 77057
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