I maintain my SPX medium-term scenario that calls for a correction phase that will retrace a portion of the 3 -wave EWP off the October 4 low. Therefore I am confident that the intermediate up trend will not be questioned.
As a reminder of my preferred long-term scenario, price is involved in unfolding a Double ZZ from the 2000 top; hence we are now in the wave (X). This wave (X) is also tracing a Double ZZ and price is now involved or it has completed at the April 2 peak the wave (A) of the second and last Zig Zag.
As I mentioned I cannot be sure if the 3-wave up leg off the October 4 is the entire wave (A) or just a wave (w), in the case that also the assumed wave (A) is unfolding another Double ZZ.
What I can say is that if the wave (A) is in place then we should expect that the wave (B) pullback should take a longer time to develop, 2-3 months, while a wave (X) should be a shorter time wise affair.
As you can see dealing with corrective EWP is not an easy task, as there are always several viable options "on the table".
So I am confident that we will see higher prices during 2012, but I have reasonable doubts regarding the length, time-wise and price wise, of the current correction.
Therefore in addition to EWP and counts I will pay close attention to momentum/breadth indicators, investor sentiment, VIX and the EUR.
I maintain the idea that price from the April 2 top will unfold a Zig Zag down. Therefore on April 10 price has established the bottom of the wave (A), now price in involved in tracing a corrective wave (B). Once the wave (B) is in place, price will unfold an impulsive wave (C) down that could match the 65 points drop of the wave (A).
EW wise without an impulsive or ending diagonal decline I cannot consider completed the EWP from the April 2 top. Neither we have seen a spike in volatility, a price exhaustion gap down, extreme low readings of Tick or extreme high readings of Trin, which usually are expected to occur when price is establishing a "confident" bottom.
As I mentioned yesterday the unanswered question remains from where the wave (C) will begin. To make the immediate time frame more complex we have Double Bottom patterns in several US equity indices that are making bulls "salivating".
I am giving a leeway of maneuver up to the range 1393 - 1398 SPX for the assumed wave (B).
On the other hand if price achieves an eod print above 1398 (Bullish Island reversal) then the expected immediate bearish set-up will be killed and despite still being a potential bearish wave (B), a retest of the April 2 top will be the most likely short-term scenario.
In the Technical Front:
- Momentum is now giving mixed signals. If my short-term scenario plays out then the RSI must not break the upper trend line & the MACD must not cross the zero line.
- The McClellan Oscillator must reverse below the zero line otherwise the Summation Index will most likely issue a buy signal.
Therefore, in addition to wave counting which sometimes may not be reliable, if momentum and the McClellan Oscillator don't reverse than we will have a warning that my short-term scenario is wrong.
For the immediate time frame the extreme low reading of CPCE increases the odds that the wave (B) pattern could be close to an end.
Sorry if I may sound as a broken record but I keep stressing the issue that the EUR's EWP does not support an immediate equity bullish resolution.
As I mentioned the EWP from the April top is clearly corrective but it is not over yet. If my count is correct price is now involved in establishing the top of a corrective wave (X) that should give way to a Zig Zag down that can challenge and breach the horizontal support at 1.2970.
I am watching the horizontal resistance at 1.3274 or the Trend Line resistance as a potential reversal zone.
And lastly I have been following the potential Inverted H&S of the VIX.
This is the key pattern to be monitored. It is very simple as it either bottoms in the area of the 16.39 zone shaping the right shoulder of the Inverted H&S or it kills the bullish pattern, consequently aborting the SPX bearish setup.
To sum up: As long as SPX price does not confirm a bullish Island Reversal with an eod print above 1398 I expect at least one more down leg.