Longer time frame EW pattern:
I maintain the same scenario I mentioned in my last weekend post:
"If my primary count is correct SPX completed with a Triangle a Triple Zig Zag from the November 2008 low.
The structure of the decline off the July's peak is corrective and can be counted as a wave (A) of a Zig Zag. Hence, in my opinion, a countertrend rebound wave (B) will be followed by a wave (C) down.
The Top established on July can either be the Wave (X) of a large Double Zig Zag off the 2000 peak, which would imply that the current wave (Y) could fully retrace the move from the March 09 low or it can be a wave (A) of a larger Zig Zag from the November 2008 low."
Today I have to consider that given the surge of NDX above the 200 dsma, we cannot rule out that the intermediate up trend has resumed its path higher or at least it raises doubts regarding the scenario of a pending larger down leg.
Below I have a possible Triple ZZ in progress off the October 2004 low, in addition price could have shaped a large bullish Inverted H&S
Therefore I have to add, although it seems a less likely option, the scenario that assumes a completed corrective wave (B) pattern, which implies that the intermediate up trend has resumed with a wave (C) up that will carry price substantially higher above the "nominal high" established at the July`s peak at 1347.
For trading strategies despite NDX strength I am more focused on the shorter time frame and as I mentioned above I am looking for a countertrend move that will be followed by more weakness tracing a potential Zig Zag off the July's peak = ABC.
Therefore the current rally should be a wave (B) that will be followed by a wave (C) down.
Therefore if the shorter time frame scenario is correct price should trace a 3 -wave up leg off the October 4 low.
If instead of a 3-wave up leg price shapes a fiver up then all bets are off and we will have to consider that NDX is leading the equity market to new highs.
Last week we had two potential reversal patterns that could have established the top of the first up leg but both were aborted.
It is obvious that this move is overstretched with extreme overbought readings of momentum and breadth indicators.
Last Friday I mentioned that the McClellan is at such an extreme overbought level that it should give higher odds for a pull back
But this is not the only overbought indicator:
- 10dsma of the NYSE adv-dec volume is at the higher boundary of its historical range = overbought zone.
- The RSI of the Summation Index is entering the overbought zone.
- Daily readings of the NYSE adv-dec volume with negative divergence.
- Weekly RSI at the trend line resistance.
- Daily RSI & MACD at their trend lines resistance while the Stochastic is at less then 7 points from where in the past it has reversed strongly to the down side.
- ON Friday NYSE TICK = 929
Hence the probability of a "large" reversal is getting increasingly higher.
Where will the assumed wave (A) top?
Lets try to identify possible targets:
a) If we take into account the weekly time frame:
If a top is not in place yet then the obvious spot is 1230.71:
- It is the August 31 peak
- We have the 20wsa.
- We have an old trend line off the July 2010 low.
If 1230.71 is breached then the next target range is: 1243 -1249
Where we have:
- The 0.618 retracement off the truncated wave (Z)
- The March 18 swing low
- If we take into account the daily time frame:
At 1230.71 we also have the upper BB, then above it we have the 100 dsma at 1237
On Friday we had a very strong close (as mentioned above with an overbought NYSE TICK reading of 929)
We have another Marubozu that could be the first part of a 2 days reversal candlestick pattern, if on Monday we get a small range body / harami / dark cloud cover.... Etc.
In order to consider that this up leg is completed we need an eod print below the 3 dsma = 1203.66
The expected target of the assumed wave (B) down is located in the range 1172-1155.46
Two issues are bullish friendly:
- Sentiment: both the Investors Intelligence and the National Association of Investment Managers are extremely bearish
Courtesy of sentimentTrader
Courtesy of sentimentTrader
- The 10 dsma of CPCE is too high
To sum up:
Given the overbought readings and an overstretched up leg I looking for a top of the "first" up leg in the range: 1230-1249
If my scenario is on track the following pull back will be corrective with a target in the range = 1172-1155