I have a confident view regarding the SPX long-term time frame scenario, which calls for a wave (X) in progress from the November 08 lows. Probably the intention of this large counter trend move is to challenge the 2007 top.
I never adopt "perma bears" attitude but if this scenario plays out the world will have huge problems once the wave (X) is in place, maybe by the end of 1212.
I am also quite confident that the assumed wave (X) is unfolding a Double Zig Zag, therefore as I have already mentioned several times before, price is now involved in shaping the wave (A) of the second Zig Zag.
So far so good.
I have also mentioned that since we are dealing with corrective moves it is quite difficult to define the exact location of price within the EWP, since corrective patterns can easily morph and there is the additional exogenous "invisible hand" that constantly intervene in the market "painting the waves".
If price from the October lows is unfolding the wave (A), taking into account that the move so far is a Zig Zag (ABC), then we should expect an intermediate top once the impulsive wave (C) which began at the November 25 low is done.
The expected target range for the wave (A) is located in the range 1440-1500.
Once the wave (A) is in place, if my scenario plays out, then a multi-week corrective wave (B) pullback should find a bottom in the range 1300-1257, maybe the 200 dsma which today stands at 1266 will be the candidate area for the bottom. Then we will have a likely 4th quarter rally with the final wave (C) up.
So far so good.
Now the problems:
On Monday, the structure of the wave (5) has been distorted by Bernanke comments since now we have a 3-wave up leg from the March 6 low.
EWP wise a 3 -wave move cannot be considered an ending pattern therefore we have to be aware that now we have to deal with a wave (5) extension either with an impulsive or an ending diagonal pattern.
Yesterday I mentioned that: "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."
But for the time being, unfortunately, I can only guess the potential shape of the assumed Ending Diagonal since we could be in the infancy stage of the potential wedge.
If the DJT is leading in this scenario then the SPX ending diagonal will probably spend most of the month of April in order to be completed with a choppy price action.
Therefore we have to be aware that an ending diagonal is a tough pattern that can end soon or it can extend higher. In my opinion since a topping process usually requires time I would not rule out a frustrating time consuming wedge.
So if this is a potential scenario let's check what the technical indicators are suggesting:
Momentum Indicators are not bullish: RSI with an extended negative divergence is now losing the March 06 trend line; Stochastic is in overbought territory and could roll down; MACD has negative divergence and could trigger a sell signal.
Breadth indicators are mixed:
- 10 dsma NYSE Adv-Dec Volume is neutral hence it could allow a move higher before entering the overbought zone.
- Summation Index: I have mentioned before that even if the clear down trend apparently can be considered a bearish sign, with an equity market that has not even threaten to correct it is now deeply oversold.
- Weekly Summation Index It is a good indicator for multi-week directional moves. If the weekly stochastic issues a buy signal it should strengthen the price up trend during the month of April.
- McClellan Oscillator is trapped between 2 converging trend lines and depending upon which one is broken we should expect a breadth thrust north or south. If north it has lot of upside before entering the overbought zone.
In the currency front the USD Index appears to have more down side potential, and we know that with a weak dollar the "Risk Trade" will be "switched on".
Here I am working with a complex large wave (B) in progress that is unfolding a Double Zig Zag. If this count is correct price should be now tracing the wave (B) down of the second Zig Zag. If last Wednesday lod goes then price could have a potential target at the 200 dsma = 77.85.
If everything goes as planned the bottom of the USD index wave (B) should coincide with the top of SPX wave (A).
Lastly it is the time to play a close attention to VIX since it usually anticipates an equity top with a bottoming process.
The common pattern usually is a wedge; from the August 08 top we do have a bullish falling wedge, which has the lower trend line support in the 11 area.
Yesterday it reversed at the upper trend line leaving a bearish Spinning Top. Now it remains to be seen within the boundaries of the converging structure where it will bottom.
Quarter end is in sight so we might see some choppy action probably tilted to the upside.
Next week we have an economic agenda with plenty of economic releases with the main focus on April 6 NFP.
While on April 10 AA will kick-off the earning season.
"Que Dios nos pille confesados"
(Translation: "when something really serious and unexpected comes up, people say this to indicate that they don't know how the problem is going to end, and that it can lead up to the worse, so better be prepared for anything").
I am going to be out from tomorrow until April 6. it is the school Easter break, and I don't want to miss one the last opportunities, since they are growing too fast, to spend time with my children.