Like every weekend update I begin the analysis with the SPX monthly chart, where I have labeled my long term "map".
The synthesis is:
Double ZZ from the 2000 Top = (ABC=W; X; ABC=Y)
This EWP locates price in the wave (X). Once the wave (X) is done price will begin a multi-year decline unfolding the wave (Y)
The wave (X) is also tracing a Double ZZ and if this count is correct price is now involved in tracing the wave (A) of the second ZZ.
The unknown question is if we have the top of the wave (A) at 1422 and in consequence price will begin a multi-week/month corrective wave (B), similar to the price behavior, which occurred on April 2010 and on May 2011, leaving the door open for the "common" fourth quarter rally.
With one trading session left to end the month of April, judging from the monthly candlestick it seems that the attempt to begin a large corrective wave (B) is being challenged by a strong end of month reaction, as the Bulls with the help of Central Bankers are not willing to consent to carry out a correction.
Therefore barring a sell off next Monday, the uptrend of the price segment form the October 2011 low is still intact. As long as the eom print is above the 3 m MA = 1392, price will not accomplish the initial determining factor that would open the door to a decline.
Statistically we all now that we are entering a period of the year where in the past price have established important tops. This price weakness has occurred on May 2007, May 2008, April 2010 and April 211. In addition the monthly stochastic is in overbought territory and it could be topping, although we have to wait until next month to see if it has rolled down.
In the weekly chart we can see that the assumed top at 1422 is still unconfirmed as long as price does not breach the recent low at 1357. In addition we have a bullish weekly Hammer that suggests the refusal of price to begin a decline.
Therefore we cannot rule out that price has completed a small corrective pattern and is ready to extend higher the EWP of the wave (A); I am referring to the 3-wave up leg off the October 4 low.
Similar to the 3 m MA = 1392 of the monthly time frame, in the weekly time frame, as long as price trades above the 10 w MA = 1386 the expected decline will be negated.
Hence if two weeks ago the most likely scenario called for a Zig Zag down, today, the odds that price has began a large corrective phase have shrunk, so bears now have to pray for a lower high / double top.
Weekly momentum is suggesting that the uptrend may be bending since the stochastic bearish cross issued on March 30 is still in force and the MACD is approaching a potential sell signal, while the RSI is struggling to recover above the trend line support in force since August 2011 in addition we have potential negative divergence in place since the end of March.
So the big question is: has price once again fooled the bears with a shallow correction and SPX has bottomed at 1357?
Before analyzing the short term EWP where we have "the crux of the matter" that will shortly decide the next directional move, and in order to avoid relying only on wave counting, I suggest to "listen" to the bullish statement made by breadth indicators.
Last Thursday I mentioned that, despite the price action was suggesting that a larger correction was in the cards, the McClellan Oscillator was flashing warnings by moving above the zero line. Keep in mind that this short-term breadth indicator has remained negative since mid March.
We ended the week with a forceful move higher of the McClellan that can trigger a "jet propulsion" effect on price, since it is obvious that if breadth improves it substantially increases the odds that SPX has not topped at 1422.
We now have a new buy signal issued by the Summation Index.
And a worrisome, for the bearish set up, weekly stochastic buy signal. Usually when the weekly stochastic issues a buy signal it moves from the oversold zone to the overbought zone in a multi week time frame before issuing the next sell signal.
These buy signals usually are not whipsawed.
Therefore this sudden breadth turnaround substantially decreases the odds that price is on the verge of beginning a new down leg below 1357.
Lastly the daily momentum indicators also have turned bullish with a new buy signal issued by the MACD and the RSI recovering above the 50 line and the breaking above a trend line resistance in force since mid-March.
Therefore breadth and momentum indicators are suggesting a likely bullish reversal.
Regarding the EW count of the rally from the October 4 low, I am not embarrassed to admit, that it leaves room for a lot of uncertainties. I have lost the confidence needed to pursue a particular wave count.
Therefore I will switch my focus to the short-term time frame as long as the "picture" does not clarify.
For the time being I put forward 2 scenarios that are dependent on the short-term confirmation/failure of the bullish reversal:
- Bullish Reversal: The Wave (A) from the October 4 low is tracing a Double ZZ, in which case price is now involved in unfolding the last wave (c) of (Y). A top should be in place once a 5-wave up leg is completed.
- Bullish Reversal Fails: Then price is involved in a larger corrective wave (B) that should have a target in the range 1340-1292.
Lets now go to the daily chart and review 3 potential short-term EWP
- Bearish set-up:
Price on April 10 has established the wave (A) of a larger ABC decline. If this scenario is still valid price has to reverse to the down side early next week with an impulsive decline with a target in the range 1340 - 1292
- Bullish set-up (1):
Price has completed a shallow correction with a truncated wave (c) and it has resumed the uptrend with an impulsive up leg. This scenario will be dependent upon a corrective pullback and if the 50 d MA = 1383 is not breached again.
- Bullish set-up (2):
If in the next pullback the structure is corrective and price loses the 50 d MA then we could have potential Triangle wave (B) in the cards.
To sum up: the surprising and unexpected strength which curiously coincided with last Wednesday's FOMC day has bended the "logical" short-term bearish set-up. In addition the sudden improvement of market breadth has further weakened the bearish scenario. The daily momentum indicators are also favoring the resumption of the uptrend.
The bullish ideas are now dependent upon a corrective pullback that holds either above the 50d MA to allow the launch of a wave (3) up or above 1358 if price has in mind a time consuming contracting price structure.
Judging from Friday's Spinning Top the odds that a pullback could occur as soon as next Monday are quite large. The magnitude of pullback should help define the next directional move. The "majority" is assuming that it is a buying opportunity, hence it will be odd to see price losing the 20 d MA = 1387.
The short-term pattern of the DOW remains a caveat for an immediate bullish resumption of the uptrend but in a market where HFT and manipulation is abruptly killing technical guidelines and EWP it may be just a trivial issue to attempt to identify where the correction ended and to what extent can be reliable the resumption of the uptrend with a corrective up leg.
The EUR's EWP is also strongly questioning a bullish resumption of the equity up trend. In my opinion the up leg form 1.2993 is clearly corrective, and unless price breaks above 1.3300 the odds of being fully retraced are large.