Entering 2010, the S&P 500 Index was in the process of completing impulsive strength off the March 2009 low. Since underperforming the 200-day MA by a record 36%, price-action has since oscillated in a narrow band around the 200-day MA. Key medium-term turning points have each been preceded by divergences between price and daily MACD. A shift in trend, however, was not confirmed until price-action had managed to clear the important 14-day MA.
The 5-wave decline off the April peak stalled in early July despite breaking below a broad Head & Shoulder's neckline and impending fears of the so called “death cross.” It was then that various measures of breadth hinted of a selling climax. More importantly, RSI had reached oversold levels not seen since the panic lows of spring '09. The knee-jerk recovery has now extended back above the 200-day MA and has subsequently held 14-day MA support. As such, there is additional room for current strength to retest the April highs given the lack of daily MACD divergence and that RSI remains comfortably below overbought levels. In addition, S&P 500 futures indicate a lack of hourly divergence suggesting robust short-term momentum. On the other hand, if the current rally manages to close below the 14-day MA (now at 1095), the recovery would be at risk of exhausting and could suggest that the latest move is a corrective zig-zag rather than a possible 5-wave progression.
STRATEGY: Buy S&P 500 futures at market risking 1087, targeting 1217
