Late last year, the US market bottomed on November 16, 2012. Since then it has been powering higher defying all odds. During this time – 196 calendar days or 134 trading days – the index has not had a significant pullback. Before last week’s decline, it had only three shallow pullbacks averaging -3.43% and lasting for an average of nine calendar days.

Between May 22nd and May 31st, S&P 500 has declined -3.35% in nine days. The current S&P500 rally has stayed within a very well defined upward sloping channel.

Previous pullbacks had taken the price to the lower channel limit. At the moment the price is well above it which means that there is more room for it to drop. The chart shows couple of weak support areas – 1) four day consolidation area in early May with a 1623 support level; 2) The last swing high of 1597 made on April 11th; 3) 38.2% & 50% Fibonacci ratios, from the last swing low, at 1626 and 1609 respectively.

Support levels below these two will most likely instigate breach of the trend line.

Last year, from early June to mid-September, too the index had staged a rally within an upward sloping channel without a 5% pullback. At that time the lower channel line was broken on October 11th, almost a month after the high was made on September 14th. Eventually the index bottomed on November 16th with a -8.9% decline in 63 calendar days.

The current rally may remain intact if the lower channel line is not broken – which means that the decline should not go beyond -5.5% in the next couple of days. If the trend line is broken then next major support level is the swing low of 1536 made on April 18th, which is slightly below the 38.2% Fibonacci ratio of the rally. This is in -10% decline range.