If a market refuses to confirm a bearish set up it means that something else is "cooking". Then we have to consider that the rally that began at the October 4 low may not be over yet.
But at the same time I don't think that price has established a Major Bottom at the October 4 low since the structure of the rally does not have an impulsive look. Therefore once the assumed countertrend move completes its EW pattern (A potential Zig Zag), the price reaction should be ugly.
2 weeks ago we had a potential bearish weekly Hanging Man candlestick this week we have a Doji. The Bears attempt to achieve follow through to the downside has failed. The 20 wsma has been unbeatable.
Bulls now have to achieve a weekly close above the 50 wsma = 1271, which coincide with the 200 dsma and attack the descending trend line.
If they succeed then we will have the confirmation that the "bear" market rally has more business to the upside with an assumed wave (C) up.
On the upside the immediate resistances are 1271 - 1285.08 - 1296
A weekly close above 1296 will open the door to a move towards 1330 - 1347 - 1370.
But given the extreme overbought weekly stochastic of the Summation Index I don't expect a major break out above 1370.
Therefore as long as price remains above 1215 it is now reasonable to have a neutral/bullish bias going forward.
Bears had another spectacular failure by wasting the opportunity of a "text book" Head en Shoulder in the DAX.
The 3 -wave down leg off 6194 was a warning of a potential bear trap. Bulls still have a lot of work to accomplish here but if they achieve to close the gap at 5753 then odds of a trend reversal will increase considerably.
Bears can only hope on a Leading Diagonal if they get an immediate reversal next Monday.
Although the battle in the short time frame may be leaning towards a bullish resolution, the longer-term pattern is bearish. We have a clear 5 - wave decline off the July's peak. Therefore we have to expect at least one more large down leg once this countertrend move is over.
Not even the Italian MIB 30 has a bearish look.
In addition of having a potential impulsive move off the September low, which is suggesting at least one more "large" up leg is pendig, last week, when the Italian 10 yr. government bond was crossing the point of no return with a yield above 7% (556 bps above Bund) the Italian stock index on Wednesday did not even established a lower low. On Thursday it closed with a bullish Inverted Hammer and on Friday gap up and go .........
Next week if the Gap at 16018 is closed (bullish Island reversal) this market could go on "fire" for a while.
There are some additional positives for the Bulls:
- NDX is showing its willingness to move higher.
There is potential large Inverted H&S and the rejection -(October low) - at the neckline has allowed price to attempt the resumption of the intermediate trend to the upside.
Since such a bullish outcome is not clearly supported by the SPX wave pattern maybe NDX could be completing the wave (e) of a Triangle.
For the short term here there is also a potential Triangle wave (B).
Also notice how the 200 dsma has been able to reject several times the attacks from the bears.
- Bullish seasonality
- Sentiment is moving in the right direction but not an extreme yet (AAII bull ratio).
Bears have on their side the daily momentum indicators signal crosses by Stochastic and the MACD & of the NYSE BPI.
The EUR does not seem to have an EWP that can allow a move above the October peak, but the corrective structure of the overall pattern off the April top does not give a large confidence on an immediate bearish outcome either.
The short-term outlook would improve if the EUR recovers above 1.3970
SPX Potential Options:
On Friday SPX had a gap up and go, although volume was anaemic, probably due to the closed Bond market.
Two short term indicators are overbought: TRIN = 0.48 & TICK = 1024
Hence for Monday at least a "mild" pullback should be expected.
Last week I was working with 3 potential patterns for SPX:
- Triangle wave (B).
- Zig Zag wave (B).
- Major Reversal.
Given the price inability to trace more that one potential impulsive down leg I have lost confidence on the option 2 & 3. These scenarios are now less likely as long as price does not breach the critical support at 1215(SPX).
While if the Triangle is the correct pattern price has to remain below 1277.55 (wave d) and above 1227 in the missing - wave e - down.
In addition I will add Option 4, which calls for the wave (C) off the October 4 low already in progress:
But in order to have confidence on the bullish set up we need VIX to head lower breaking the November's low.
Here there is a potential bullish falling wedge.
Is it completed or it needs one more down leg?
To sum up:
Next week we have to keep an eye on Italian BTP yield.
The bearish resolution is placed on quarantine as long as price does not breach the critical support at 1215 (SPX). The loss of last Thursday's lod at 1227.70 should be considered a warning for the bullish set up.
The bullish resolution could shape a Triangle or we could be already in the impulsive wave (C) up.
Therefore corrective pullbacks should be bought against Thursday's lod.