Weekly Technical Analysis
As I mentioned last week I have been reassessing my long term preferred EW count.
I have to admit that I was not expecting this break out. The unquestionable corrective internal structure of the rally from the June lows and the weak performance of breadth indicators were strongly suggesting that the logical path was a larger corrective pattern from the April 2 top that would have allowed the resumption of the March 09 up trend with an impulsive move. This is why I was expecting a potential Flat / Expanded Flat or a Triangle:
As I mentioned in my last weekend technical analysis: "The 3 corrective options are still possible, but it looks obvious that Central Banks are fully committed to maintain the equity market rallying."
Now I have to take for granted that price at the June lows has established an intermediate bottom and that the CORRECTIVE trend from the March 09 has been rebooted by an aggressive FED response.
The "heart" of the scenario remains the same: From the 2000 Top Price is involved in unfolding a large corrective pattern that could end up being a Double Zig Zag. If this long-term scenario plays out then price is approaching a major top since the next price sequence will be the wave (A) of the second Zig Zag that will be heading back towards the March 2009 lows.
Therefore this long-term scenario is valid as long as the current corrective move from the March 09 lows does not substantially breach the 2007 Top.
So where are we within the large corrective (countertrend move) off the March 09 lows?
Since I cannot consider the rally from the June 4 low as impulsive but at the same time it seems obvious that price has resumed the intermediate up trend then we have to consider the EWP options that allow the market to head higher with a corrective internal structure instead of an impulsive one:
1. Double Zig Zag (ABC = W; X; ABC = Y).
From the October 2011 low Price with another DZZ is unfolding the wave (A) of the second Zig Zag:
2. Double Zig Zag (ABC = W; X; ABC = Y)
From the June 4 low price has began to unfold an Ending Diagonal wave (Y):
3. Triple Zig Zag (ABC = W; X; ABC = Y; X; ABC = Z)
From the June 4 low price has began the third Zig Zag:
Now lets move to the shorter time frame analysis where the main issue is WHERE THE UP LEG FROM THE JUNE 4 LOW WILL TOP?
Price has reached an extension target at 1468.69 and it is now at a striking distance of the weekly gap at 1478.49.
If this gap weekly gap is closed the next resistance is at 1500
I maintain the count from the June 4 low, which calls for a Triple Zig Zag therefore if this count is correct a top should be around but we need some type of confirmation in order to consider feasible even a short-term reversal. Keep in mind that the last higher low is at 1429 and there is a steep trend line from the July 24 low that has to be breached.
The trend line from the October 2011 low will most likely reject bearish reversals attempts (the 200 d MA is aligning within the trend line); therefore going forward pullbacks could be muted.
On Friday we had another spike above the upper BB + a potential bearish Shooting Star, but the internal structure of the pullback off the hod looks corrective therefore I don't trust this reversal candlestick unless on Monday we have an eod print below the 3 dMA = 1454.
Once more we can see in the daily chart above why pullback can be shallow, as dip buyers will most likely step in the range of:
- Previous break out area at 1428.68.
- 20 day MA and Trend line support from the July 24 low.
If this support area is breached then we have the pivot support at 1396.56 and the 50 d MA = 1392.
While any larger pullback should be contained by the 200 d MA and the rising trend line from the October 2011 higher low.
Now let's have a look at what momentum and breadth indicators are suggesting:
- RSI is approaching the overbought territory. We have a "nice" trend line form the June lows that will maintain the trend up or notify a reversal.
- Stochastic is overbought.
- MACD has a bullish cross in force since the beginning of August.
b) Daily: Overbought and stretched
- RSI is overbought but it is has erased the negative divergence. Here we have a trend line in force since the beginning of September that once/if it is breached it will be issuing s sell signal.
- Stochastic is overbought and could easily issue a bearish cross.
- MACD ha a bullish cross in force since September 7.
Breadth: No sign of weakness but getting overbought.
- Summation Index has erased the negative divergence. The RSI is entering the overbought zone and still maintains a negative divergence.
- The weekly Stochastic of the Summation index has issued a new bullish cross from the middle line. If this signal is not reversed next week SPX could "go to da moon".
- The McClellan Oscillator is entering the overbought zone but as of Friday we don't have any indication of "selling pressure". I have added the Stochastic in order to detect initial weakness if it issues a bearish cross. But as long as we don't see a bearish cross of the MA and the loss of the Zero line I would not bet a dime on a large pullback.
- The 10 d MA of the NYSE ADV-Dec Volume is approaching the higher range where in the past price has reversed to the down side.
Regarding market sentiment, as I mentioned on Friday: "judging from the following CPCE chart (Contrarian Indicator) we can see that it is approaching extreme low readings, often a market top is around."
- The long-term pattern (from the 2008 top) could be unfolding a bullish falling wedge, therefore if during the next weeks/months the lower trend line is not breached odds of a major break out to the upside would substantially increase.
- In the short-term time frame the fear index is maintaining a bearish (for equity) divergence, as it keeps holding above the August low.
In the daily chart below, I have included the envelope (10,10). It is a tighter BB. Usually when the "body" falls below the lower band, the next day an eod print above it can issue a sell equity signal.
Lastly it is quite obvious that without a rebound of the USD index chances of expecting a pullback of the equity market are nil.
Here we have the May 1 higher low and the 0.5 retracement of the entire rally from the May 2011 low = 78.56 that may hold and allow an "oversold rebound".
Next week the main risk event is Quarterly OPEX on Friday.