Stocks Rally off of Recent Lows

| July 7, 2010

The violent, oversold reaction that we have been expecting finally materialized today as the S&P 500 index surged over 3%, returning to previous congestion support at the February low of the cyclical uptrend from early 2009.

This developing rally should not be able to break above congestion resistance in the 1,104 to 1,110 range, and we would expect it to end sometime over the next two to four weeks. Given the extreme nature of the last short-term downtrend from June, it would not be surprising to see the new uptrend test downtrend resistance currently near 1,095. Now that the massive head and shoulders formation on the weekly chart has broken down, the next step in confirming the start of a new cyclical downtrend would be a weekly close below the recent low at 1,022.

Given the absence of any meaningful support directly below recent lows, a weekly close well below 1,022 would also likely result in a relatively quick move down to strong congestion support in the 950 area.

Category: Commentary, Market Update

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