David Fuller's view

We saw a sharp rally over the last two weeks.  Wall Street’s S&P 500 Index, shown on a daily basis over the last year, has moved from a short-term oversold position at the end of September to an overbought condition today.  It has lost upside momentum near the mid-September high and formed a small downside key day reversal today. 

What happens next will tell us a lot about the medium-term outlook, extending through 1Q 2016.

Was August’s move to the downside a typical, short, sharp correction in an ongoing bull market, similar to what we saw in 2010 and 2011, or the beginning of a bigger shakeout?   

The best case outlook would be a temporary consolidation near current levels, followed by a further push up into this year’s top area.  That would clearly demonstrate that demand still had the upper hand.  Alternatively, a consolidation which took more time – after all, this is October – would still be positive provided that it did not move much below 1950.  Lastly, sentiment would deteriorate on a retest of the August-September lows, not least because overhead supply had once again reversed the rallies.