This is a thrilling moment, and bears for the first time in a long time should be feeling a sudden quiver of excitement.
SPX's EWP from the April 2 top looks like a corrective and inoffensive 3 -wave down leg that is going to be bought by dip buyers. Some EW analysts are considering this EWP a wave (4) that will lead to the resumption of the intermediate up trend. This option is technically improbable since the first up leg off the October 4 low was not impulsive; hence I am giving to this option a low probability of being the correct one.
Instead, in my opinion, price could be involved in kicking off a larger corrective pattern that should retrace partially the October 4 - April 2 three-wave up leg, with a wave (B) that could make a shot to the 200 d MA = 1277.
If this scenario plays out I would initially establish as the potential target the range 1300 - 1277.
Fibonacci Retracents are at: 1289; 1248; 1207.
I believe that this scenario has to be respected because it does not take into account only wave counting. I think that also Market Momentum and Breadth indicators are suggesting that price should be involved in a large corrective pattern. In other words the current (ABC) unfolded by SPX is not over.
This is what I deduce from SPX weekly momentum "picture":
While the Summation Index that was one of the "racehorse" for the bullish resumption of the intermediate up trend has aborted the kick off with a new sell signal:
In addition risk correlated markets (currencies and commodities) are also getting hit, which is suggesting that investors are looking for "safety".
To sum up the market behavior is sending a cautious message.
Yesterday SPX failed to confirm Tuesday's potential bottoming candlestick (Doji), instead price kept "impulsing" down establishing the lod at 1347.75
The strong recovery into eod has left in the chart a bullish hammer, which is suggesting that the impulsive down leg off the May 1 peak is done.
Therefore if price confirms what breadth and momentum indicators are suggesting then yesterday's lod should be the first impulsive wave of (C), which means further weakness ahead.
Clearly only the structure and extension of the probable rebound will confirm or kill the bearish set up.
In the daily chart below I highlight a potential target range for the assumed countertrend bounce, once/if price closes yesterday's gap down at 1369.58 = 1374 - 1387.
If price recovers above the 50 d MA = 1387 then the bearish set-up will be jeopardized.
Also it is desirable that the rebound should be over before Friday in order to avoid a weekly hammer.
In the 30 min chart below we can see the fiver down; btw it is the first clear impulsive down leg in a long time.
If, as it seems, it is done then the important # to monitor during the rebound are:
- Gap = 1369.58
- Previous 4 & 0.382 Retracement = 1373.60 - 1373.90
- 0.5 Retracement = 1381.58
The 0.618 Retracement at 1389.59 should establish the line between the bearish-bullish ideas.
In addition to the daily Hammer and short-term EW count, the extreme high reading of CPCE is also strengthening the idea that price will attempt a multi-day rebound.
I don't have much time to extend today's update with the EUR, but my scenario remains the same. I am expecting a Zig Zag down from the May 1 peak. I also suggested monitoring if Gold confirms the potential Triangle that should lead to a wave (C) thrust down.
If SPX wave (B) scenario is correct we have to see fear in the market. This is why VIX has to launch the "assault" by confirming the Inverted H&S. If it fails we will know that price is not in a bearish mood.
Lastly I want to show you a "text book" Double Bottom project of SPXU (3 x Short SPX etf). If it is confirmed clearly the bearish set-up will be up and running.
To sum up: The US equity market is at a critical juncture that could open the door to a larger correction. We are witnessing a thrilling moment that depending upon how price behaves during an imminent rebound will dictate the trend.