A Rally? ... For real?

After that double top pattern had formed? After last week, the S&P 500 had presented chart-watchers with both a day one sell-off and a follow-through day? After the daily MACD for that same S&P 500 had displayed the "cross-under" of the 26-day EMA by the 12-day EMA with the histogram of the 9-day EMA in negative territory? Those would be quite bearish conditions. Yes, they would. Still, there was a rally. A strong rally. Does it count? Was it meaningful? Take another look at the daily chart....

While the reading for Relative Strength is neutral and has been neutral for almost two months, that daily MACD is postured quite bearishly. The "day one" and the "follow-through" day are both circled in red. The double top reversal is as clear as a bell, with the August 5th low of 5,119 serving not as a downside target, but quite possibly as the pivot. Should that play out, (I am by no means certain as the traditional rally season of late October / early November into the year's end lies ahead and this is an election year) this scenario would put the April lows (4,953) in play.

Put bluntly, there is good reason to keep one's head on a swivel right now and behave more defensively and less aggressively than if conditions were normal. On the bright side, Monday was an "inside day" which means that the entire daily candle fits inside of the candle from the prior day. That is usually taken as a sign of cooling volatility.

Disappointingly, despite the rally, the S&P 500 lost contact with its own 50-day SMA on Monday. The index might not have a lot of time to re-engage with that level before the algorithms that game price discovery and often force overshoot (note both Friday and Monday as evidence) decide to target the 200-day SMA. Keep your eyes on the 21-day EMA, should that line cross below the 50-day SMA (baby death cross), the swing crowd will indeed swing.