SPX Monthly Chart - July 2011

     We closed near the lowest prices of the month basis the cash SP500 index. After breaking below the TD Demand Line (upsloping dashed green line) in a qualified manner in June, we has a calculated objective of 1276.35 which was met that same month. We then bounced quickly higher and moved above the June high in early July but then sank during the rest of the month. Of interest is that the July price action failed to confirm the Demand Line break. Although this leaves open the possibility that we rally, I think the odds are against a sustained move to new highs. Here's why:
     First ...  Using the RSI (top pane) as a trend indicator we can see that we have turned down right in the area reserved for bear market resistance. That is, this indicator is currently saying that the rally from 2009 is most likely corrective in nature and that we may have run out of steam.
     Second ... Another negative development on the monthly chart is the decline in the Derivative Oscillator (middle pane) over the past two months which has led to a bearish divergence with both price and the RSI. This bearish divergence is also being shown by the Composite Index (not shown).
     Third ...  June's downtrending price bar was also a price flip (closing lower than the close four bars prior) that cemented the TD Combo sell countdown in February. Note that this was also the first price flip after a sell setup bar #9. This setup bar #9 implies that we should have resolution of this bull/bear tension within five months. The Combo sell and bearish divergence in the derivative oscillator and composite index argue for a bearish resolution.
     These three developments, in my mind at least, outweigh the demand line failure and cast doubt on the equity market going forward. Even if we get a rally in August it will be hard to believe it is a bullish omen. In fact, even if we were to break the 1404.05 (TDST resistance) level in a qualified and confirmed manner it is hard to see a sequential sell signal not forming at the same time - we have been on bar #11 since May.
      With all that said, I have to keep in mind the Bottom Line: in my asset allocation work the actual "sell" signal will not come unless we get a print below the March low of 1249.05. Even though I believe that risk is growing for longer term investors (like myself), the monthly chart remains in a bullish position in my work. That is, it does not negatively impact asset allocation towards the equity market at this moment. As just mentioned, a break below the March low would change that situation.