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Jason Haver: With S&P 500 Rally That Beat Expectations, Bulls Keep Hope Alive for the Moment


Market bears have now been forced into a final stand. Here's a look at the next key levels.

Tuesday's update noted that the stock market had reached a significant inflection point and anticipated that the S&P 500 (INDEXSP:.INX) would rally over the near term, with a target of 1840-48. That upside target was reached early Tuesday, which led to a deep retrace and retest of the low. The upside target zone was then exceeded in Wednesday's session. SPX also cleared the noted 1850 pivot and broke out of the down trending channel.

As I covered in detail in the last two updates, I was concerned that sentiment had become a bit too bearish and that a stock market rally might be needed to "punish" the newly converted bears. Frankly, the rally in SPX exceeded my expectations -- punishment indeed, and it certainly must have been painful for the traders who weren't expecting any rally at all. Bears have now been forced into a final stand at the key resistance zone of 1873. 
Click to enlarge

The NYSE Composite (INDEXNYSEGIS:NYA), on the other hand, has only marginally exceeded its second upside target zone (10,440-490). The two wave counts detailed on Friday, which warned of a potential bottom near 10,250, are also both still standing. The key pivots are noted on the chart below.

Click to enlarge

The bond market continues to hint that there may be underlying stresses in play, and the ratio of the iShares iBoxx High Yield Corporate Bond ETF (NYSEARCA:HYG) to the iShares Barclays 20+ Year Treasury Bond ETF (NYSEARCA:TLT) -- or HYG:TLT -- is now poised at an inflection point:

Click to enlarge

In conclusion, my last update covered the intermediate bull argument in detail and was, in fact, bullish over the near term -- but ultimately concluded that treating the bounce as a selling opportunity (essentially until proven otherwise) was a reasonable stance. Bulls have certainly added some excitement to the game, since the upside targets were reached and exceeded.

Nonetheless: Rules are rules, and the key 1873 (intermediate) level hasn't been reclaimed yet. While I have a few indicators on early buy signals, ultimately price trumps indicators. Therefore, the bear case for stocks still stands as preferred for the moment.  
Bears will need to reject the rally rather directly and defend 1873 to avoid facing yet another new all-time high -- and while I can't say for certain that's what will happen, the very short-term charts do suggest it as a distinct possibility. The next few stock trading sessions should be revealing. Trade safe. 

Follow me on Twitter while I try to figure out exactly how to make practical use of it: @PretzelLogic.

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