Watching For the Start of a Pullback

We began the week with an up trending price bar on the daily chart of the cash S&P500. Let’s update how this price action fits into the bull and bear arguments laid out yesterday.

The current target on the daily chart is the 1020-1025 area, but will we hit it before a pullback commences? The first item of interest is the TD Supply line. After failing to confirm a qualified break last week we now have a new qualified break when we went through 996.56 yesterday. If we see confirmation today it favors hitting the price target quickly.

The second issue involves both the RSI (top pane) and Composite Index (middle pane). An outright “sell” signal (bearish divergence between the two) would occur if both of these indicators were to turn down from their present level. This action would favor the imminent start of a pullback. Of course the bulls rightly point out that the signal will not even occur if we have yet another bullish day today.

The last point is that the current TD Demand Line (the upward sloping green dashed line) is right under the market at 998.14. A price move below that level today would be qualified. The bulls respond that, even if qualified today and then confirmed tomorrow, it would only project a shallow retracement of the rally. But remember that those price projections are minimum targets. Of more concern at this point is holding last Wednesday’s low. A break of 968.65 (Wednesday’s low) should be taken as a sign that the larger Alpha pulse (shown in my roadmap post of July 25) is complete and that the expected August pullback (Beta pulse) is underway.

A developing story to add to the mix is the TD Combo count. It has now reached eleven. Recall that a count of thirteen (which may come as early as Wednesday) could trigger a sell signal.

Bottom Line: Bullish with a short-term target of 1020-1025 but cautious -- watching for the start of a pullback within the ongoing rally. The first warning sign would be failure to confirm the qualified TD Supply Line break of yesterday while moving below the TD Demand Line and seeing RSI/Composite Index divergence. A break of 968.65 would confirm the pullback (correction) is underway.