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).
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:
From this chart I "deduce" the following conclusions:
- Since the end of January price has been tracing a bearish rising wedge.
- Within the rising wedge price is most likely unfolding an Ending Diagonal.
- Friday's hammer with the lod at the intersection of the lower trend line of the rising wedge may allow another push higher.
- The "point of no return" is an eod print below 1363.81, which should provoke a swift price collapse.
- The low of the expected EWP for the wave (4) pullback is located in the range of last month NFP gap = 1325.54 - Trend Line support from the October 4 low. If the gap at 1325.54 is filled then the 50 dsma could be tested.
- A move below 1300 will most likely jeopardize this scenario.
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.
- Daily Momentum:
- Summation Index has triggered a sell signal on February 14. This has been a "scandalous" and striking event; I have never seen a falling Summation index while price is creeping higher. Price manipulation? The fact of the matter is that with this deterioration of market breadth the price uptrend is "surviving" on borrowed time. As already mentioned breadth indicators will soon reach oversold readings (RSI<30)
- NYSE BPI is the last major breadth indicator to join the "trio" with a new the sell signal triggered last Friday:
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:
- DJT: It has rolled over since February 6. I have no clues regarding the overall count form the October lows, since with further weakness will have the overlap, leaving a corrective 3 wave up leg from the November's lows. The structure of the current pullback looks also corrective. We have a potential Bear Flag. If it is over the next down leg will most likely reach the 200 dsma.
- SMH: On February 26 I mentioned that the Semiconductor etf could have began the correction of the wave (4). Now it seems obvious the pullback is in progress. A lower high is a "fait accomplis", in addition we have a most likely bearish Head & Shoulder with a target at 32.50
- IWM (Russell 2000 etf): On Friday price has finally confirmed the loss of the critical horizontal support at 81.18 (February 3 gap). Price could have a truncated the wave (5) by failing to accomplish the common thrust out of Triangle. If this assumption is correct we could have a completed EWP from the November lows. Therefore the assumed top would be either a wave (W) or a wave (A). In this scenario there is no restrain/limitation regarding the depth of the pullback but it should be larger then the one expected for SPX. We have to see how price behaves once/if it reaches the 50dsma and the rising trend line support. Anyway I guess that the 200 dsma could come into play.
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.
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.
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
Next week the main focus will be Friday's release of NFP
- iPAD 3 release on Wednesday (anecdotal turning window for the overdue pullback?)
- ECB rate meeting on Thursday