The S&P 500 Index found itself at a crossroads in July, with action over the latter half of the month likely to set long-term direction. After the sell-off in June, the index had recovered to the point that a challenge of the May high of 1,370.58 seemed likely (see "S&Ps at crossroad"). A move beyond the previous high would indicate a move to the final leg of a five-wave uptrend, while a failure to set a new high would establish a double-top formation.
As of this writing the first possibility seems the strongest. The first wave of the five-wave uptrend ran from the March 2009 low of 666.79 to the April 2010 high of 1,219.80, followed by the second-wave retracement from the previous high to the July 2010 low of 1,010.91. The third wave took the index to the May 2011 high before the abrupt sell-off to the June 2011 low. A move beyond 1,370.58 could trigger the fifth wave, setting up a possible test of the October 2007 high 1,576.09 (solid red line).
The other possibility could be triggered by ongoing global economic struggles. If the index fails to take out the May 2011 high and falls back below the minor uptrend line connecting the March 2011 and June 2011 lows (light blue line), then it would signal that the fourth wave retracement could extend beyond the recent consolidation. If so, the initial price target would be 1,138.33, the 33% retracement of the previous uptrend or the more traditional 38.2% Fibonacci retracement around 1103.
Darin Newsom is senior analyst for Telvent DTN where he provides daily market insight and analysis based on his more than 20 years of experience analyzing markets and developing risk-management strategies. Newsom can be reached at firstname.lastname@example.org.