We are at a critical juncture. We have a challenging environment that demands patience, effort and skill.
SPX price is not showing a straightforward path; instead it is unfolding an enigmatical pattern.
I am aware of the issue that inter-market divergences are suggesting that the equity market is involved in a topping process. Bulls now don't have the support form the NDX-NAS nor from the Russell 2000. In addition Financials (KBE-XLF) are lagging badly. We don't have an healthy market if only the DOW achieves new highs.
We also have unfavorable seasonal considerations since the equity market in the past has established intermediate tops in the months of April-May.
Last Sunday I posted the SPX monthly momentum chart where we can see that Stochastic has triggered a sell signals on May 2008, April 2010 and on April 2011. Now we have an overbought stochastic that is rolling down and could trigger a sell signal by the eom. In addition the RSI has began to point down since the end of March and has a clear negative divergence.
If price is establishing a top, then be ready for a multi- week/month pullback and if my scenario is correct the RSI should not breach (eom reading) the rising trend line support.
My long-term scenario remains the same. With a 5 -overlapping wave structure from the 2009 lows I am not expecting a major top, since we need a 7-wave pattern.
Therefore if price confirms an intermediate top, and if my count is correct, then price will begin a wave (B) pullback with a potential target in the range 1293-1258. This wave (B) will be followed by the last up leg that will most likely conclude the EWP from the 2009 lows.
In the monthly chart above we can compare the current location of price relative to the May 2011 and April 2010 tops and how the 3m & 6 m MA played a major role in confirming the price reversal.
On Friday, the current monthly candlestick dipped below the 3 m MA. Further weakness will make the slope of the 3m MA to roll over, and if price drops below the 6 m MA then it is obvious to expect further weakness. The bearish cross of the two MA will seal the bearish deal.
In addition to the 6 m MA an eom print below 1357.38 will be enough to consider completed the up leg from the October 2011 lows.
Do we have a confirmation that the market has peaked? In my opinion not yet but clearly it is hanging by a thread.
If you have been reading my posts last week I changed my bias to a bullish stance for 3 reasons:
- Market breadth thrust.
- Absence of impulsive down side action.
- EUR most likely corrective EWP from the February top.
In addition the AAII bull ratio is not an extreme bullish reading:
Lets review the 3 bullish arguments:
- Market Breadth:
We have conflicting signals.
At the end of April the weekly stochastic of the Summation Index triggered a buy signal. Usually this is a reliable indicator, which in addition gives multi week trend reversal warnings.
However the buy signal issued by the NYSE BPI has been short lived. Here we have a new sell signal and not even a positive divergence with respect at the April 24 low.
And the short-term breadth indicator, the McClellan Oscillator has fallen back below the zero line.
If the 5d & 10d MA issues a bearish cross then it could spoil the breadth thrust from the April 10 low.
The market deterioration can be also seen in the momentum indicators:
RSI: The recovery above the trend line support in force since the August has been short lived. (We know have lower highs/lows).
Stochastic: it remains with a sell signal in play since March 30.
MACD: it is issuing a sell signal.
RSI: It has broken the trend line support in force since the April 10 low and it has lost the zero line.
Stochastic: it remains with a sell signal in play since May 2
MACD: It is on the edge of cancelling the buy signal triggered on April 26.
Conclusion: Market breadth and momentum indicators have deteriorated and are not longer a bullish argument.
- Absence of impulsive down side action:
The broad concept of Elliot Wave Analysis relies on two wave structures: Impulsive & Corrective. The former identifies directional moves while the latter is a countertrend interruption.
It is unquestionable that the wave structure from the March/April peak is corrective. If we analyze the Dow EWP from the March 16 top we can only conclude that price is involved in a corrective pullback, hence the intermediate up trend from the October lows remains up.
Therefore the corrective price structure implies one of the following scenarios with the line in the sand at the April 10 low (SPX 1358 & DOW 12846.81):
- Price is involved in a corrective pattern that will lead the way to the last up leg that will complete the wave (A) of my long-term count.
- Price has established the top of the wave (A). Then we are in the initial stages of a large corrective pullback wave (B) that will retrace a portion of the up leg off the October lows. (Potential target in the range SPX 1293-1258).
Short-Term Price Action
Friday's sell off has inflicted technical damage but price remains within the boundaries of the 2 potential bullish EWP discussed last week: Ending Diagonal or a Triangle. But there is a small "safety margin" left with one last horizontal support at 1366.70 and one speculative trend line that connects the March 6 low with the April 23 low. If price breaks the critical pivot support at 1358.79 then all "bullish bets are off."
Friday's candlestick does not indicate a bottom yet, next Monday we need to see a bottoming candlestick such as a Harami or a Hammer in order to expect at least a bounce.
Since SPX is at a potential inflection point VIX should give us clues regarding the two potential scenarios: resumption of the up trend or extension of the correction.
On April 11 I discussed the "project" of an Inverted H&S. The right shoulder could be done. If this pattern is the token of the equity bearish scenario then Friday's gap up should not be closed and there cannot be a failure, in the next few days, to break the neckline at 21.90.
SPXU (3 x short SPX etf) can provide the same warning as the VIX. Here we have a Double Bottom Project with a target at 11.33.
If this pattern has a chance to pan out price should not close Friday's gap up at 9.24.
Sector wise there are not many bullish EWP around.
We still have the potential Triangle idea for the DJT but the "heavyweight" sectors don't presage bullish breakouts.
- NASDAQ COMPOSITE: Can we consider a bullish event that price last Friday has closed the huge gap up originated by AAPL earning release?
- KBE (Bank etf) does not give any bullish vibration either. The probability of a move above the March 19 high is almost zero. Instead the EWP suggests that the "common-sense" path is most likely to the down side with a wave (C) down that should take price to test the Trend Line Support off the October lows.
Next, a quick look at the 30 yr Bond. I have no idea of the EW count but we have a massive wedge in progress. There is no indication that it is completed. Moreover there is a "Double Bottom Project". It is common sense that without a reversal of the Bond market we should not have a bullish hedge in the equity market.
Sorry if I don't review the EUR EWP but it is getting late and I have personal matters to attend. I will review it tomorrow so we can also take into account the reaction to the French and Greece elections.
To sum up: I don't like to "change the jacket" on a weekly basis but honestly it is a fact that the technical indicators are reversing towards a bearish resolution, in addition the major US equity sectors are not unfolding bullish EWP.
Next week bulls have to prove by defending the critical support at SPX 1358 that a corrective wave (B) is not underway.