Reminder of SPX potential long-term count:
I have always been considering that from the 2000 top price is unfolding a large Double Zig Zag = (ABC=W; X; ABC=Y)
The first Zig Zag down ended at the November 2008 low. Since then price has been tracing a counter trend move which is the assumed wave (X).
Since the price structure is clearly corrective it fits properly with this scenario.
Within the wave (X), in my opinion, the appropriate count calls for another Double Zig Zag. Therefore if this count is correct price is now tracing the wave (A) of the second Zig Zag. Once the wave (A) is in place price will undertake a multi-week correction that will be followed by the last impulsive or ending diagonal wave (C) up that will probably challenge the 2007 peak.
I have to point out that since a wave (X) by nature is a counter trend move, the EWP unfolded can easily morph within different patterns reducing the predictability of EW analysis, in other words most of the time we will be "behind the curve", hence, experience and intuition will play a major role.
If we rely on the 3 & 6 month MA we can deduct that the wave (A) will be in force as long as price does not breach the 3m = 1358 while a "mild pullback" wave (B) will probably find a bottom at the 6m, today it stands at 1305, which also coincides with a horizontal support. But the uptrend could even withstand a much deeper retracement at the rising trend line support.
If SPX has began a correction, it remains to be proven, I am in the camp of expecting for the time being a "mild correction", not only for EWP reasons but also above all because we don't have the extreme AAII bull ratio readings that usually comes with a major market reversal.
Now the question is where the wave (A) will top?
Of course it depends upon when Central Bankers will decide that the market is due for a breather.
In the mean time I can say that if price clears the 1406 horizontal resistance the next obvious potential stopping point is located in the 1440 zone.
Given the well-known exogenous stimulus, if price also breaks the 1440 area then there is "only thin air" until the upper Trend Line Resistance in the area of 1500.
In the weekly chart below I have a more detailed labelling of the potential EWP.
My best count for the assumed wave (A), from the October 4 low, calls for a Zig Zag (ABC).
But we cannot rule out that, the initial Zig Zag could morph into a Double Zig Zag since within the overall structure; so far, the wave (A) has been a "short haul". Please compare it with the complex EWP of the first wave (A) from the March 09 low.
In the case that the current wave (A) evolves into a Double ZZ then a wave (X) pullback could bottom in the range 1300-1276.
If this week's Spinning Top, it is a remote possibility since this market never goes down, has established some type of a top, keep in mind that we can also count a completed impulsive up leg from the November lows, then price has to drop below the immediate support at 1378.
A "mild" correction should have a target at 1340 while if the the 10 w MA which stands at 1357 is breached the next target box should have a target in the range 1302-1274.
In this regard there are several technical signals that suggest that a pullback could pan out:
- Weekly Spinning Top + 5 -wave up leg.
- The retracement has been deep enough to consider completed the up leg from the March 6 low (The assumed wave (5)).
- We can count a five wave up leg off the November 25 low, although we know that the wave (4) pullback was too shallow.
The confirming irrefutable evidence that will validate this EW count will occur when price breaks the Trend Line Support that connect the wave (2) & wave (4) at 1376.
On Friday the Dow bounced after almost reaching its Trend Line Support.
While the DAX, which has been also unfolding the same EWP from the November lows; on Friday it rebounded off the critical gap support at 6932.
Here the needed confirmation requires an eod print below 6845.
- Momentum indicators have reversed to the down side. In addition to the omnipresent negative divergence of the RSI we have a new bearish cross-issued by the Stochastic:
While the MACD of SPX is on the verge of triggering a new sell signal, in the DOW and the DAX on Thursday their MACD have triggered a new sell signal:
- The McClellan Oscillator since March 14 is in negative territory and in addition we have a bearish cross of MA. If SPX has some type of a top in place the oscillator should not break to the upside of the Trend Line Resistance:
- NYSE BPI has triggered a new sell signal:
- The Summation Index has a sell signal in force since February 14, showing a huge negative divergence, but the RSI is already inside the oversold zone. This considerable drop of this breadth indicator should prevent a major pullback of the equity indices:
These are the "good news" for the bears.
The bad news are that in addition of having to fight an unequal battle against Central Bankers they are not able to obtain an impulsive down leg.
Since the December up leg is in force every single attempt to provoke a trend reversal has been a short lived corrective affair, resulting in a clear and persistent up trend.
Last week 's pullback unfortunately is also corrective; you have to be creative in order to come up with an impulsive labelling, and creativity is a dangerous feature in EW analysis. Therefore Bears have to pray that Mr Market has begun a corrective pullback. The trend reversal will have to be corroborated by a lower high in the next few days. Keep also in mind that as we approach month & quarter end the market's bias will most likely be bullish.
Short Term Price Action:
In my opinion the price action can be labelled as a Zig Zag = ABC. We know that until now ABC means higher, therefore Bears badly need a lower high and then break the mentioned Trend Line Support.
Therefore next Monday/Tuesday they will have to cross the fingers and hope that price will be detained in the range of the 0.618 retracement = 1404 - last lower high = 1407.75 with a wave (B or X).
Usually a short-lived counter trend rebound traces 2 up legs. At eod Friday we only have one, hence I believe that by eod Monday /Tuesday we should have the Zig Zag in progress with the potential reversal set up "on trial"
A few other short-term indicators like CPCE, Trin & Tick did not reach extreme readings at Friday's lod, then maybe "this time it could be different".
On the other hand if the EWP is "another bear trap" then even if it could sound " science fiction" price could unfold another impulsive or ending diagonal 5 -wave up leg.
KBE (Bank etf) is the major index that has been the driving "force" behind the last impulsive up leg. It is out of the question to expect even a mild pullback of SPX if KBE does not roll down.
Here my best overall count, from the October 4 lows, calls for a Triple Zig Zag that could be completed.
If it is done then bears have to hope that price does not close Thursday's gap down at 24.22.
A "mild" correction, probably a wave (2) should bottom un the range of the Trend Line Support - 50 dsma while if it is a wave (B) It should bottom above the 200 dsma.
VIX is probably the best indicator that in my opinion is suggesting that the equities indices are not ready for a major top yet.
From the August 2011 peak the price structure could be shaping a bullish falling wedge, but without an indication of a bottom, price could be heading towards the lower Support Trend Line, which today stands in the area of 11. This area probably is the last support left before reaching the all time lows at 9.38 which was established on December 2006.
For the short-term time frame it does not look likely a break out above the Trend Line Resistance while sideways move between 16.58 - 13.66 seems more feasible.
Equity bears need a double bottom.
The EUR is the "unknown quantity" for the short-term equity outcome, since unfortunately the EWP from the January lows consists of a bunch of 3-wave up legs, which results in a trend less move, although the absence of an impulsive decline increases the odds that price has more business to the upside before completing a larger wave (B).
Therefore for the short-term time frame since the "picture" is not clear, I am on a "wait & see mode".
I am aware that price is at a significant potential inflection point but the odds are equally split between a bullish & a bearish resolution.
Below I have 3 potential set ups.
- Double Zig Zag Option:
If price is unfolding a DZZ then we have a projected target for the wave (Y) at 1.3864.
This count will be strengthened if price breaks above the immediate support at 1.3291.
Price has to breach the Trend Line Support in order to kill this scenario.
This outcome will be bullish for the equity market.
- Triangle Option:
The above idea of a bullish DZZ could morph into a Triangle wave (B).
If this count is the correct one then it would fit with a potential mild correction of the equity market while the EUR unfolds the wave (E) of the Triangle.
- Head & Shoulder Option:
Price could be now shaping the right shoulder of a bearish H&S. If this EWP pan out then the projected target would be located below the January lows.
This scenario is the friendliest one for the equity bears.