Long term time frame EW pattern
We don't have technical reasons that suggests that the rally off the November 2008 low is completed, as a matter of fact, since on July the sell off from a possible triangle has been only a 3-wave down leg, price could be involved in unfolding a wave (B) with a pending second leg down that could have as a target the range: 1074-1010
Therefore the main idea is that price is now in the process of completing a corrective 3-wave up leg, which will be followed by large decline, maybe shaping a Flat or a Zig Zag wave (B).
I have maintained a bullish stance since the EW pattern from the October 4 low is a 3 -wave move which translates into an ABC wave structure. If SPX is now tracing the wave (C) then we know that it has to be either impulsive or unfold an Ending Diagonal, therefore I have to assume that the EW pattern is not completed yet.
In the weekly chart below we can see that if price is able to break through the horizontal resistance at 1293 then the potential target, depending upon the EW structure that finally adopts the wave (C), can be located in the range 1330 (horizontal resistance and trend line from the 2007 top) - 1371 (this summer's peak).
Below we have to watch the 50 w = 1268 & the 10 w = 1244
Even though the EW pattern does allow more upside we have to be aware that price is involved in a topping process. We already have warnings from overbought momentum and breadth indicators in addition to negative divergences, which are alerting that price, is approaching an inflection point.
- Weekly RSI has a potential DT
- Weekly Stochastic is overbought
- NYSE BPI has a potential negative divergence while its RSI is overbought.
- NYSE Summation Index idem as the above
- Weekly Stochastic of NYSE Summation Index is extremely overbought.
The above indicators are fulfilling a necessary condition for a Top but it is not sufficient.
More troubling issues:
- 10 dsma of CPCE has continued to drop and now it is reaching the level that established the July's top.
- AAII bull ratio has reached an extreme level of optimism. This is a contrarian indicator that usually it translates into troubles for the stock market.
- Seasonality is now negative especially for the Technology sector.
So much for the scary things, now lets review the short term EW pattern.
The Assumed wave (C) currently, is a 3-wave move therefore as, I mentioned, it cannot be considered over.
Wave (C) options:
Since the up leg off the Dec 19 can be counted either impulsive or corrective we have 2 options:
- Ending Diagonal:
Assuming that the wave (III) is already in place, price now has to maintain a corrective pullback with the overlap below the wave (I) with a potential bottom at the gap fill = 1257.60 then the final corrective up leg will establish the top of the wave (C) within the converging structure.
As I mentioned on Friday:
“If SPX is tracing an impulsive wave (C) then I even assume that price may be involved in an extended wave (3). If this is the case, in the next pull back, the wave (II) will have to be shorter then 64.69 points and last less then 8 days, therefore the target should be located in the range 1257.60 (gap fill + 200 dsma) - 1243 (50 dsma)”
Keep in mind that we have a large cluster of support in the 1260 area with the gap fill, the 200 dsma, the 0.382 retracement and a rising trend line. While in the area of the 50 dsma we also have the 10 wsma.
If price fails to unfold one of the 2 options discussed above then I will give a second chance to the Triangle scenario.
For the immediate time frame, if price breaches 1274.55 then, in my opinion the up leg off the December 19 low will be locked in. Then it will be a matter of waiting to see where this down leg bottoms.
From the initial structure of the current pull back at least we know that we don’t have a major top in place.
The daily stochastic and RSI are also suggesting that a pullback is in progress. Next week we have to monitor if the MACD ia able to maintain the bullish cross.
In Europe, the DAX has a clear wave pattern. Here, in addition at the moment, the most likely scenario calls for an impulsive wave (C), so I am very anxious to see the extension of the potential pull back.
I will end this weekend analysis with a short comment regarding the EUR but looking at the USD Index.
On Friday the well-defined Double Bottom of the EUR was aborted by the announcement of a massive down grade of Eurozone countries by S&P, however I believe that the EUR could still attempt to establish some type of a bottom. If we look at the daily momentum we still have a positive divergence in both the RSI and Stochastic.
I am not going to show a count for the EUR, I prefer to wait until eod on Monday; instead the USD Index (DX) could be completing an Ending Diagonal.
If the overall count is correct then a wave (B) pullback may reach the range: 79.39 - 77.65
Clearly the lower it drops the upside potential of the equity's wave (C) should be larger.
Next week will be thrilling as we have:
- On Tuesday C & WFC earning reports.
- On Wednesday FOMC & GS earning report.
- On Thursday BAC, MS, GOOG, IBM, INTC & MSFT earning reports.
- On Friday OPEX & GE earning report.