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Pullback to 1,100 would be orderly

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Sometimes, traders and investors get hooked into looking at their bar charts and start concentrating on yesterday's lows and highs to get a feel for the market. The point and figure chart gives hint that a pullback in the S&P 500 Index (SPX.X) to the 1,100 level would be quite normal and not much to be concerned about. However, the bullish trader that has just "loaded the boat" at "S&P 1,150" might think otherwise.

S&P 500 Index Chart - $10 box

The current bullish price objective from the vertical count gives hint that the SPX has some upside left to $1,220. But risk/reward to that upside, measured against a pullback to support near 1,100 is rather unfavorable from the 1,150 level. A normal 3-box reversal from the recent trading near 1,150 would come at 1,120 and that's still 13 points away from current intra- day levels of 1,133.

Back in May (red 5) the S&P 500 was able to get above the bearish resistance trend and that took some doing. At that time, the bullish percent reading on the S&P 500 was getting near the "overbought" level of 70% bullish. With current levels of bullishness at 61%, there's plenty of fuel left in the tank for traders/investors to see a move higher and eventually eat through the bearish resistance trend (red +).

Over the next couple of weeks, we may see some back filling take place by the S&P 500 and offer bulls some trading opportunities to get long some recently strong stocks on pullbacks near support.

The recent action in the bond market and selling there has undoubtedly raised some cash in the coffers of institutions. They're not opposed to locking in some gains on stocks that may have gotten ahead of themselves near-term.

Institutions don't just "load the boat" one scoop and let them run. They'll work a stock just like a regular "Joe Trader" should.

With our shorter-term indicator in the NASDAQ-100 bullish percent ($BPNDX) at overbought levels, it makes perfect sense that we're seeing some selling near-term. By correlating that observation with the point/figure chart of the S&P 500, we can then easily see that a pullback in the SPX near the 1,100 would be most welcome. Especially for those bulls that have been rather patient in recent weeks.

Jeff Bailey
Senior Market Technician
Option Investor

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