Due to Monday's rally induced by Bernanke, the SPX impulsive up leg off the November lows which was at risk of being completed; the door has been reopened for another extension higher.
Basically this translates into a wave structure where the pullback has been corrective while the large upward move has been impulsive; hence unquestionably the trend is once again up.
If the trend is still up then the impulsive up leg off the November 25 low is not completed, therefore price is still involved in the wave (5).
I will maintain this scenario as long as price does not breach Friday's lod at 1386.8.
A wave 5 can either be impulsive or unfold an ending diagonal.
In my opinion given the overextended move it is not out of the question that price might not have the required "vigour" to trace another impulsive move hence the odds of an Ending Diagonal are large.
I have already highlighted that the potential target range for the unfinished wave (5) is located in the range 1440 - 1500. We also have extensions targets at 1448-1511-151.
Yesterday's price action, in my opinion, can be interpreted, as the common "digestion" after a strong and somewhat not expected rally.
In addition the EWP is also suggesting that price's intention is to retrace a % of the recent up leg. We could expect a Zig Zag or a Double Zig Zag with a target in the range of the 0.382 - 0.5 retracement = 1406 - 1403. Maybe the 10 dsma = 1404 could be tested.
We are getting close to an inflection point but given the exogenous factors that are the main reason behind the strength of equities, it is not wise to anticipate trying to pick the top.
Momentum Indicators are suggesting that price is losing its exuberance, since we have negative divergences on the 3 indicators in addition to the Stochastic in overbought territory.
But we cannot rule out a bullish thrust of breadth indicators since the NYSE Adv-Dec Volume is not overbought and I also mentioned several times that the Summation Index is already quite oversold.
In addition we don't have a negative divergence in the Cumulative Adv-Dec Volume.
For the Immediate time frame I would not rule out further weakness with a potential move towards the 10 dsma, and a most likely choppy rally into Friday (End of month & quarter).
Next month we will have plenty of events that can interrupt or extend the bullish party. The major events are.
April 6 NFP.
April 10 AA kicks off the earning season.
April 25 FOMC.
In addition, news from Europe can hit the tape any day.
I have also mentioned to monitor the EUR and VIX.
- The EUR because as long as the corrective up trend remains in force it will benefit the equity uptrend.
- VIX because usually it bottoms before the equity establishes a top.
Also don't lose sight of KBE (Bank etf) because without them, SPX will have a hard time to maintain the trend u.
Here depending upon the depth of the current pullback we could have a wave (II) in progress, if price does not loses the Trend Line Support or something more bearish below it; a potential wave (B.
As a matter of fact the Energy Sector (XLE) may have already established the top of the October EWP with a wave (B) down already in progres.
It is common in the last stages of an extended EWP to "see" diverging price actions among major sectors.