Weekly Technical Analysis
Lets begin with a brief review the long-term count that I am working with:
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 the end of the wave (X), which will be a major top since the next price sequence will be the wave (A) of the second Zig Zag that will carry price 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 (counter-trend 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:
- From the October 2011 low price, with another DZZ, is unfolding the wave (A) of the second Zig Zag:
- From the June 4 low price has began to unfold the final up leg with an Ending Diagonal wave (Y).
Lets now move to the shorter time frame analysis.
I have already discussed for the umpteenth time that in my opinion the internal structure of the rally from the June 4 low cannot be counted as impulsive, instead I consider more appropriate a Triple Zig Zag. Furthermore given the impulsive up leg off the September 4 low I also take for granted that on September 14 price should have completed the corrective up leg.
Therefore if on September 14 we have a complete TZZ then the pullback in progress should extend lower with a potential target in the range between the 0.382 retracement and the rising 200 d MA = 1395 - 1365, although the rising trend line in force since the October 2011 lows will probably prevent additional weakness.
From the September 14 high so far we have the first down leg at 1430.53; wave (A) of a potential Zig Zag or Double Zig Zag down.
As I mentioned last Thursday: "The irrefutable fact that the current bounce from the September 26 low at 1430.55 is overlapping gives to me a huge confidence that the next directional move is going to be to the down side."
This counter trend bounce is the assumed wave (B).
In order to consider that the bounce off the September 26 is over price has to move back below the 20 d MA and close Wednesday's gap up at 1450.99 with an impulsive internal structure, unfolding the wave (C).
The "sine qua non" on which much depends for my preferred scenario to play out is that price will have to break through the huge support layer 1430 - 1422 where we have the last reaction low + Trend Line support form the June lows + April 2 high (previous break out area) + rising 50 d MA.
If we do have a down leg but price does not breach 1430 then my count of the June's up leg is wrong, as it will most likely extend higher towards the next resistance located in the area of 1500.
Friday's price action, with SPX gaping up to close lower leaving a bearish Spinning Top, is a strong sign that the bounce off the September 26 reaction low could be done. If it is completed then bears need an eod print below 1456.89 by next Monday/Tuesday.
While closing last Wednesday's gap at 1450.99 will most likely seal the deal opening the door for the next battleground in the range 1430-1422. If 1422 goes then price will most likely drop quickly to the next support at the 0.382 retracement = 1396.
If we move on to analyze the internal structure of the rebound from the September 26 low we can see that.
- We can have a completed corrective pattern = Double Zig Zag = wave (B)
- The initial down leg off last Friday's hod can be counted as impulsive; hence it can belong to the initial stage of the wave (C) down.
Recap of my preferred short-term scenario:
- On September 14 price has completed a TZZ. This top can be considered a wave (A) or a wave (I) ed.
- If the September 26 low (1430) is the first part of a bigger correction, then the current bounce has to fail to make a new high.
- If on Friday we have the failed attempt then down side action has to be impulsive and price has to break through the support layer 1430 - 1422.
In the technical front:
Despite that the weekly momentum indicators agree with the scenario of a larger corrective pattern, since we have the RSI that has breached the trend line off the June lows and we have a bearish cross of the Stochastic.
upside momentum of the current bounce has been strong, with the Stochastic triggering a bullish cross on October 3, but the MACD remains with a sell signal in play and the RSI is showing a large negative divergence against its September 14 peak.
If a larger correction is underway the RSI will have to breach the trend line support in force since the September 26 low and break the 50 line, since it would be incoherent to have a positive divergence of the RSI.
The same reasoning can be applied to the McClellan Oscillator.
Next week we have to see a substantial deterioration of this breadth indicator otherwise the bearish scenario will have no chance to play out.
Speaking of negative divergences the most striking one can be seen in the 10 d MA of the NYSE Adv-Dec Volume
The weekly Stochastic of the Summation Index has issued a sell signal. When a sell signal is triggered by the weekly stochastic, it usually drops into the oversold territory before triggering a new buy signal.
Finally a look at the VIX is essential.
Here we have a potential Double Bottom project, which is strengthened by Friday's Inverted Hammer (bottoming candlestick) + positive divergence of the RSI.
Next week we have to play close attention how the reversal set up evolves.
So far no one wants to fight Ben`s obvious plan to push stock prices higher but, for a while, if there is an "explosion" higher of the VIX it will result is a sharp drop for the equity indices
VXX is suggesting with an almost completed Ending Diagonal that a sharp move up of volatility is in the cards.
Next week the economic agenda is light but we have AA kicking off earning season next Tuesday.