Intermediate-term Stock Market Scenarios

| March 25, 2011

The S&P 500 index closed moderately higher today, moving slightly above resistance at the upper boundary of the downtrend from late February. Technical indicators are now moderately bullish overall on the daily chart, supporting a continuation of the reaction from last week.

With respect to cycle analysis, the alpha phase rally of the current short-term cycle has been as extreme in character as the beta phase decline that preceded it. We are approaching the window during which the alpha high (AH) is likely to occur, and it should develop sometime during the next 10 sessions. Given the assumption that this cycle is left translated, we would expect the AH to form somewhere between current levels and the congestion resistance near 1,330.

Looking ahead, the strength of the reaction off of the short-term cycle low (STCL) last week indicates that there are now two likely scenarios with respect to the formation following the long-term breakdown earlier this month. The bullish scenario would have stocks consolidate near recent cyclical bull market highs before breaking out after earnings season in April.

The bearish scenario is a prototypical double top that would have stocks sell-off sharply after earnings season.

Notice that both scenarios follow a nearly identical path until the end of April at which time the bullish scenario moves sharply higher while the bearish scenario moves sharply lower. Therefore, it will be important to monitor how stocks respond to the forthcoming earnings announcements, especially as we move into the final two weeks of the season. It is also important to remember that these scenarios offer only rough projections of the most likely bullish and bearish extremes as identified by our computer models, so the actual behavior of the S&P 500 index during the next several weeks will likely deviate from both. However, keeping in mind these extreme scenarios helps us to characterize the developing consolidation or topping formation as it unfolds.

Category: Commentary, Market Update


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