US equity indices have proven, once again, an extraordinary strength by recovering from an important sell off that in the case of SPX was originated from an Ending Diagonal. This ending pattern clearly completed the up leg from the December 19 low.
Since the end of November my scenario has remained unchanged. I have been expecting a wave (C) within a Zig Zag from the October 4 low.
A wave (C) always traces a five wave up leg either impulsive or within an ending diagonal. Once the ending diagonal option was aborted I have been working with the impulsive option.
So far the scenario is on track with the third wave of (C) completed on March 1. Therefore this outcome calls for a corrective EWP that will establish the wave (4) which will be followed by the last impulsive / ending diagonal wave (5) up.
Regarding the potential bottom of the wave (4) I have been considering the rising trend line support from the October 4 low as an obvious target.
With the wave (3) of (C) in place then as rule of thumb a wave (4) pullback has to have the right look in terms of time and size compared with the wave (2) pullback, in addition price often satisfies the alternation guideline which would suggest that the wave (4) will unfold either a Flat or a Triangle.
Given the strength of last week recovery odds are quite large that Tuesday's lod has already established the low point of the EWP, the assumed wave (A) of a flat /triangle while the current up leg is the wave (B). If one of these two EWP plays out then the following wave (C) down will give us valuable information since the Triangle option needs a corrective wave (C) while the Flat option requires an impulsive wave (C). I expect to see a positive divergence of the McClellan oscillator if the next down leg takes place.
If price breaches Tuesday's lod, then the most likely bottom for the wave (4) is located at the cluster of support of: the 50d - gap and trend line support in the area of 1325.
I don't pretend to be arrogant but I rule out that the wave (4) correction is already completed since it is too small compared to the size of the wave (2).
But If price remains above the 20 dsma = 1360 then a deviation from a proper EW rule will have occurred and lamentably my short-term scenario will be killed. In this case then I will have to respect that the final wave (5) of (C) is already in progress with a projected target in the range: 1407-1448.
So this is my preferred short term scenario based upon my knowledge of EWP.
Lets now see what the technical indicators are suggesting:
The down thrust, which ended on Tuesday, despite being corrective triggered several sell signals of major breadth indicators like the Summation Index and the NYSE BPI while the strong recovery from Tuesday's lod has allowed a forceful push of the McClellan oscillator back to the zero line and a bullish cross of the daily stochastic.
- Summation index sell signal was issued on February 14. On last Tuesday the RSI crossed the 30 line entering the oversold zone.
Despite the strong recovery of price, we can see that the breadth index remains below both the 5d & 10d MA.
- The weekly stochastic sell signal which was issued on the first week of February remains in force and it has not entered the oversold area from where it could trigger a new multi-week buy signal.
- NYSE BPI sell signal was triggered during the last week of February, it remains in force but the drop has been muted, less than 4%, signalling the underlying strength of the equity market, since 75% of the NYSE stocks remain with a Point and Figure buy signal.
- The NYSE 10 D ADV-DEC VOLUME, surprisingly, it has been in a clear down trend since the beginning of January while the SPX was creeping higher within the bearish rising wedge, which was suggesting a large process of distribution. Then it dipped fiercely below the zero line during the SPX thrust down from the ED then from last Tuesday it has backed up strongly but unable to cross the zero line. Next week we have to closely look at this indicator since a substantial move above the zero line would question the not completed corrective scenario.
- McClellan oscillator displays the thrust higher from the extreme oversold reading reached on Tuesday. Next week the oscillator should not substantially move above the zero line under the assumption that the wave (4) EWP is incomplete.
- Momentum Indicators remain with a MACD sell signal VS a Stochastic new bullish cross. It is obvious that if next week the Stochastic does not roll over then the idea that the wave (4) EWP has unfinished business will be jeopardized.
ES Globex will play a major role since with a bit of luck it will clear up the next directional move before the US market opens.
In my opinion on Friday price truncated the fifth wave of a Triple ZZ
Therefore if this count is correct and no higher high is achieved during the globex session then SPX could open with a gap down.
Last week I mentioned that I would be closely monitoring AAPL, since in my opinion price is on the verge of completing a wave (B) within a Zig Zag or a Flat. This potential EWP remains valid.
Next week in addition to AAPL I suggest paying close attention to BAC for 2 reasons:
It is unfolding a most likely triangle wave (iv) within an extended wave (V). It seems that 7.66 is unbreakable and in addition is where the 200 d MA is now standing, hence probably if the wave (E) of the triangle pan out then it will probably bottom above it.
If the Triangle plays out we will have a 9 -wave up leg, which constitutes an impulsive move. Therefore even if price is unfolding a large wave (B) from the December lows, this impulsive up leg increases the odds of additional strength 2012.
Then SPX intermediate up trend form the March 09 low should not be completed yet.
Next week the main events are:
- On Tuesday: FOMC; Greece & Italian bond auctions
- On Wednesday: Italian bond auction.
- On Thursday: Spanish & French bond auctions; IMF decision on Greece bailout.
- On Friday: Quarterly OPEX.