I give up.
I have to desist defending a count that, despite satisfying the EW rules, the market is disregarding it.
As you know I have been skeptical of considering the June 4 low as the end of a corrective EWP from the April 2 top due to the lack of impulsiveness in the last down leg off the May 29 lower high at 1334.93 SPX.
For this reason I suggested that price still had a pending wave (C) down either by unfolding an Ending Diagonal or after completing a Triangle.
Even if this outcome is still possible as long as price does not breach the last lower high at 1334.93 I have to admit that the failure to confirm Thursday's bearish Shooting Star has reduced considerably the probability of being the correct path.
In addition breadth indicators are now aligning with a short-term bullish scenario:
- McClellan Oscillator: It has a huge positive divergence at the June 4 low, a bullish cross of the MA, higher High/low from the May lows and it is moving away from the zero line.
- Summation Index: I was aware of the RSI positive divergence but now it has issued a new buy signal.
- Daily momentum is also suggesting that price should be now involved in retracing a portion of the down leg off the April 2 top:
Positive divergence of the RSI + break of the trend line resistance. The key
issue here is now a move above the 50 line.
New by signal issued by both the Stochastic and the MACD.
The short-term bullish scenario still needs the confirmation of:
- Price has to break above 1334.93 SPX
- Daily RSI has to recover above the 50 line
Next Friday we shall see if the weekly momentum indicators validate it:
- Weekly RSI has to recover above the 50 line
- Weekly Stochastic has to issue a buy signal
Therefore, even though EW wise, the July 4 is a questionable short-term bottom I have to weigh up in the "puzzle" the bullish statement given by market breadth & momentum indicators which area leaning toward a larger rebound, probably unfolding a Zig Zag or a Double Zig Zag.
So the option of a pending wave (C) down is now "clutching at straws". The Ending Diagonal idea is no longer valid while the Triangle option needs a reversal next Monday with the loss of Friday's lod and a move back towards the 200 d MA = 1288.
Lets go now to the SPX short-term bullish outcome option, which will be confirmed once/if price breaks above 1334.93.
- At the June 4 low SPX has completed with a DZZ, from the April 2 top, the wave (A) of a larger Zig Zag.
- The current rebound is a countertrend bounce wave (B). We can assign an initial target in the range 1344 - 1363. The key upside area is located at the gap and upper BB = 1353.39. We have to keep an eye at the 50 d MA that is pointing down.
- A wave (B) can do almost anything on the upside therefore if price recovers above the 0.618 retracement = 1363 then we should not rule out an attempt to achieve a Double Top with a move back at the April 2 top.
- Time wise since the assumed wave (A) was completed in 43 days then the current wave (B) rebound should at lest need 16 trading days to develop, then during the last week of June, if the 0.618 is not breached, we could see the end of the wave (B)
- Once the wave (B) is in place I expect a large wave (C) down that could test the rising trend line support off the March 09 lows.
Regarding the long term, it remains unchanged. My preferred scenario calls for a wave (X) from the November 2008 lows that will be completed once price finishes a Zig Zag from the October 4 2011 low, therefore price now is involved in tracing a corrective wave (B) that will be followed by the last wave (C) up, following the "script" of a fourth quarter rally.
For the time being I consider the trend line support from the March 09 low as the potential target for the wave (B).
If next week price confirms the bottom of the wave (A) by breaching the respective May 29's lower high then we could have synchronized this scenario with both the Dow and the NDX.
If this is the case then the waves (B) should have as an initial target the range between the 0.5 - 0.618 retracement. While the 50 d MA could come into play.
For the three indices the 10 d MA is now the critical short-term support.
VIX remains my preferred short-term gauge that should help us in indicating the equity price conduct.
The loss of the trend line support has reversed the trend to the down side. If it holds Friday's lod then it could be shaping a bearish H&S pattern.
If Friday's lod goes then the next support is located at the May 22 low, where we also have the 50 d MA in the area of 20, then the lower BB would come into play.
The stochastic is entering the oversold territory but so far there is no indication of a decrease in the falling inertia.
The EUR will be the "barometer" that should helps us measure the intensity of a potential temporary resumption of "Risk On" trade.
I have mentioned that I don't have a confident count. The main issue is that the fierce sell off from the May 1 should have unfolded an impulsive down leg, but unfortunately in my opinion the internal structure looks more corrective then impulsive, therefore despite the direction of the trend is clearly bearish and there is no indication that price has established an important bottom at the June 1 low, It is tough to detect a reasonable EWP. I can only guess that if price is unfolding a wave (C) from the May 1 lower high then maybe the current rebound is a wave (II) of an Ending Diagonal.
For the short-term, if the equity scenario of a wave (B) rebound is the correct one then, the EUR should have room for additional strength.
The kickoff of a larger rebound needs a eod print above 1.2622 in which case the potential upside target is located in the range: 1.2818 - 1.2929.
The short-term price action is clearly corrective therefore we already know that price is involved in a countertrend bounce.
We could have a Zig Zag or a Double Zig Zag in progress. If it is a Zig Zag and price has established the bottom of the wave (B) at Friday's lod then the projected target is located in the range 1.2773-1.2983.
Lastly, since Spain has formerly required € 100 billion of international financial assistance to help its financial sector, next week the IBEX will be widely watched.
The long-term EW count is quite challenging.
From the 2007 top I am working with a Double Zig Zag (ABC=W; ABC=Y)
- The first Zig Zag = wave (W) was completed on March 2009
- The wave (X) was established at the January 2010 top
- From the January high the wave (A) of the second ZZ is unfolding a complex Triple Zig Zag. Maybe at the June 4 low we have the bottom of the wave (A) of the third ZZ.
In the weekly chart below I have labeled the potential Triple Zig Zag, which began at the Jan 2010 top.
If this count is correct price has completed the wave (A).
A wave (B) rebound should at least recover the 10 w MA = 6879.
Once the wave (B) is in place I expect a wave (C) down that will establish the bottom of the wave (A) of the DZZ from the 2007 top.
In the daily chart below if price recovers above the March 2009 lows then I have highlighted the 7000 area as a potential target for the assumed wave (B).
June is definitely going to be an interesting month.
To sum up:
- Market breadth & momentum indicators are suggesting that price has established a short tem bottom at the June 4 low.
- The internal structure of the EWP from the April 2 top is corrective, but I rule out that we have a major reversal point.
- Instead, if the count that I am following is correct SPX, DOW and NDX are now involved in a countertrend wave (B) rebound that could challenge the 0.618 retracement. In the case of SPX the falling 50 d MA & the gap at 1353.39 could be the candidate target zone.
- The EUR should give us valid clues regarding the scope of the countertrend rebound
- During the month of June financial markets will be constantly exposed to headline news. The two major events that can provide a catalyst for a major move are the elections in Greece on June 17 and the FED meeting on June 19-20.
- If SPX rebounds toward the 50 d MA the probability that the FED will announce on June 20 another round of QE will decrease.
And now it is time to enjoy the Spain-Italy football match........ FORZA ITALIA!!!!