Weekly Analysis

By: TheWaveTrading | Sun, Mar 4, 2012
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The conviction that the equity market is due for a multi-day/week pullback is overwhelming.

SPX trend of the up leg from the December 19 low is hanging by a thread hence in my opinion the risk is huge for an imminent correction.

I am leaving aside the long term time frame scenarios until/if the potential Zig Zag from the October 4 low is completed, therefore, if the count that I have been tracking since the November's low was established, is correct, now price, HAS TO unfold a corrective EWP for the wave (4) followed by an Impulsive/Ending Diagonal wave (5).

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The expected wave (4) should maintain a relationship with the wave (2) regarding its size, time wise and the EWP.

We know that the wave (2):

Size  = 64.69 points
Time = 8 days
EWP = Double or Triple ZZ

Therefore the expected wave (4) should maintain "the right look".

Anything much larger then 65 points could morph the assumed wave (C) into something different.

The most important feature of the pullback will be its EWP, since if the alternation guideline is satisfied then price should unfold a Flat or a Triangle.

Given the ending pattern that price is unfolding (Ending Diagonal) + McClellan oscillator already at - 37.65, I believe that the initial down leg will be "fierce" but the market will soon enter into oversold "territory" therefore the "easy" money should be done in the first down leg.

The obvious target in my opinion is located in the range of the 50 dsma & the trend line support from the October 4 low.

A move below 1300 could jeopardize this count.

Therefore all my attention is focused on the kick off of the pullback and its EWP.

In the SPX daily chart (below) I have the potential "map" of my preferred scenario and in the left side I have highlighted the 2 possible EWP options for the expected wave (4) pullback:

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From this chart I "deduce" the following conclusions:

Since I detected a potential bearish rising wedge, price performance has been remarkable, negating several reversal set-ups, as every attempt has been killed buy the "dip buyer".

In addition to the bearish price pattern, technical indicators are strongly suggesting that the buy the dip market behaviour is unsustainable.

The "triumvirate" of MACD, Summation Index & BPI are now aligned with a sell signal while the daily RSI has breached the rising trend line support.

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Therefore to sum up the set up for a decline remains in place, I remain confident that price will finally align in the direction of breadth indicators.

The risk is huge hence I set the alert posture to "Defcon 2".

In addition to the bearish technical picture we also have sectorial divergence:

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For the immediate time frame as I mentioned above, last Friday's SPX hammer + the lack of a clear impulse down could allow another higher high, but the next push higher will most likely be sold and in the following down leg maybe there will not be the dip buyer.

NDX price structure is also suggesting a possible bullish Monday but if price is unfolding an Ending Diagonal there is not much upside left.

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Therefore depending upon the behaviour of the European equity market before the US opens next Monday, as long as there is not a gap down and go below 1363.81 SPX, we should expect maybe a another "short lived" up leg.

And finally VIX is still diverging. Although a bottom is not confirmed yet, it has not made lower lows. This behaviour usually occurs when the equity market is on the verge of establishing a top.

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I am already short of SPX, DAX and the EUR (without overdoing it)

As I mentioned on Friday I am monitoring with great emphasis the opportunity of a swing trade with FAZ (3 x short Financial etf), if the ED idea plays out, since it has a huge R/R.

Another opportunity could result with TVIX (2 x long VIX etf) since it could be on the verge of completing a large sideways corrective move. If the count that I am following is the correct one then the target range for a pending wave (C) up is located in the range: 22.85-27.32

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Next week the main focus will be Friday's release of NFP

Other events:




Author: TheWaveTrading


Contact: If you would like to contact the author, you can e-mail him at thewavetrading@gmail.com

The main objective of this project is to share my views on several markets and asset classes.

In the initial stage TWT website will be a free service.

My main focus will be the equity market with SPX being the leader but I will also follow US equity sectors, major European indices, fixed income, currencies and commodities markets.

My analysis is based upon traditional Technical Analysis, Elliot Wave guidelines and investor sentiment.

My goal is to establish the most likely path that the price of a particular asset will undertake and profit through ETF instruments both on the long and short side and mainly with leveraged ones (2 x & 3 x).

The advantage of ETF investments is that it allows getting involved in equity indices & sectors, currencies, fixed income, commodities etc.

Therefore the main purpose of TWT will be to establish investment strategies regardless if the market is in an up trend or in a down trend, leveraging the chosen scenario while managing the risk by establishing protective stop losses.

Hence I will always define the risk, I will try to let winners run the wave and I will cut the losses if my strategy is wrong.

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