SPX: Follow Up of the Short Term EWP

By: TheWaveTrading | Wed, Oct 10, 2012
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So far the "action" plan is unfolding as expected so there is no need to rummage complex outcomes.

The idea is straightforward: Price on September 17 has begun a correction that is expected to grow in size without endangering the intermediate up trend, which without any doubt remains up.

The critical battlefield is located in the range 1430 - 1422.

If 1422 is breached then the current corrective pattern will extend lower into late October. I consider this outcome as a very likely scenario.

Fortunately SPX has 3 crystal ball pivot levels that depending on how price behaves once they are approached will dictate on the longevity of the current pullback:

  1. 1430 - 1422
  2. 1397 - 1395
  3. 1370 - 1367

Probably, as I have already mentioned, the trend line in force since the October 2011 lows should prevent further weakness.

SPX Daily Chart
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So if price has in mind a larger correction, the NYSE Adv-Dec Volume has plenty of room to the down side before entering the oversold zone. On the other hand it is a an essential condition that we see substantial worsening in the breadth indictors, otherwise, as probably the majority is expecting, the 1430 pivot support will not be breached.

I don't want to go ahead of price so lets strictly attempt to act depending upon what price is suggesting.

Yesterday price confirmed the impulsive internal structure of the down leg off the October 10 lower high at 1470.96 (Assumed wave (B).

Probably the fifth wave of this possible wave (1) of (C) is not in place yet but we do know that it cannot drop below 1431.11; therefore we are approaching a potential short-term bottom.

SPX 5-Minute Chart
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In the daily chart below we can see that we have a Black Marubozu.

This candlestick usually warns that price is on the verge of establishing a potential bottom. A Marubozu candlestick most of the times is followed by a small range body. Maybe today we could see a bottoming attempt in the next horizontal support located at 1439.

Once a bottom is established if the EWP has more business to the down side price will not breach the target box = 1448 - 1452.

The extension target for the wave (C) has target in the range 1426 - 1399.

SPX Daily Chart
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Momentum indicators are shifting to the bearish side with Stochastic issuing a new bearish cross and with plenty of room to the down side before entering the oversold zone.

The RSI is at the critical 50 line. The loss of the 50 line will negate a positive divergence if price does not hold the 1430 pivot support.

SPX MACD Chart
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The underperforming NDX is strengthening my bearish scenario.

Here price has breached the September 26 reaction low and it is substantially moving below the 50 d MA. Probably the trend line off the October 2011 will come into play if price aims at the 1.618 extension target.

NDX Daily Chart
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VIX will be the "electrocutioner" of the bulls if it breaks above 17.

As I have already discussed there is a potential Double Bottom project. Depending how this pattern evolves it will pronounce sentence on the SPX corrective EWP outcome.

VIX Daily Chart
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TheWaveTrading

Author: TheWaveTrading

TheWaveTrading

Contact: If you would like to contact the author, you can e-mail him at thewavetrading@gmail.com

The main objective of this project is to share my views on several markets and asset classes.

In the initial stage TWT website will be a free service.

My main focus will be the equity market with SPX being the leader but I will also follow US equity sectors, major European indices, fixed income, currencies and commodities markets.

My analysis is based upon traditional Technical Analysis, Elliot Wave guidelines and investor sentiment.

My goal is to establish the most likely path that the price of a particular asset will undertake and profit through ETF instruments both on the long and short side and mainly with leveraged ones (2 x & 3 x).

The advantage of ETF investments is that it allows getting involved in equity indices & sectors, currencies, fixed income, commodities etc.

Therefore the main purpose of TWT will be to establish investment strategies regardless if the market is in an up trend or in a down trend, leveraging the chosen scenario while managing the risk by establishing protective stop losses.

Hence I will always define the risk, I will try to let winners run the wave and I will cut the losses if my strategy is wrong.

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