Stocks suffered a sharp sell-off last week, with the S&P 500 printing its lowest point on Thursday, day 36, placing it in the timing band for a DCL.
Stocks have since closed higher on Friday and Monday, suggesting that the DCL may have formed.
The developing recovery presents a risk/reward situation.
A break above 7681.29 will form a daily swing low. A swing low followed by a close above the 10 day MA will signal day 36 as the DCL.
However, a break below the day 36 low of 7350.35 will extend the daily cycle decline.
These levels establish two important possibilities. Stocks may be beginning a new daily cycle, or the current recovery may prove to be only a temporary bounce before the decline resumes.
Meanwhile, other stock indexes are providing supporting evidence.
Both the Dow and NYSE Composite have signaled new daily cycles, suggesting that the developing recovery may extend beyond the S&P 500.
The risk/reward consideration is whether to anticipate the DCL before confirmation or wait for the required price signals. Waiting reduces some uncertainty, but it may also mean accepting a higher entry price.
The important distinction is that improving evidence does not eliminate the risk of another decline.
For now, the S&P 500 has not yet signaled its DCL. The next move through either 7681.29 or 7350.35 should provide important evidence about whether the recovery is gaining traction or the daily cycle decline is extending.
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