Weekly Technical Analysis
Last Friday we finally got the confirmation that the corrective pattern in force since the September 14 high is not over.
Before proceeding with the weekly analysis I want to remind my stance regarding the location of price within the "bearish" wave (X), which is in progress since the November 2008:
1. From the June 4 low price is unfolding the final wave (C) with an Ending Diagonal. We have a potential extension target at 1614.
2. From the October 2011 low price is unfolding with another DZZ the wave (A) of the second ZZ.
What is a fact is that given the corrective internal structure of the pullback off the September 14 high we know that the intermediate up trend remains up. Hence we have to let price define which of the 2 potential options is the valid one. (Or show a different path).
Now lets move on to analyze the shorter time frame "state of affairs".
In the weekly chart below we can see that:
- The bulls' effort to initiating the intermediate up trend has failed.
- Second consecutive weekly close below the 10 w MA.
- 1422 remains the critical short-term pivot support.
- A break down below 1422 will open the door to a likely sharp drop towards the next support located in the range 1399 - 1396. If this area does not hold then the rising trend line support in force since the October 2011 lows will come into play.
- We have to pay attention to the fact that we have a weekly Inverted Hammer, which can be the predecessor of bottoming candlestick (Look at what occurred with the last weekly November 2011 Inverted Hammer).
I maintain the DZZ as my preferred count for the current pullback off the September 14 high. If this count is correct then price is now involved in unfolding the final wave (c) of (y).
I have already mentioned that in my opinion we have 2 potential target areas for the assumed wave (c) down:
- 1397- 1395
- Trend Line from the October 2011 lows - 0.5 retracement, where we also have in between, the rising 200 d MA = 1374.
So far so good
A wave (C) can either unfold an impulsive sequence or an Ending Diagonal therefore as long as price does not break through the pivot support at 1422 we will not have enough information in order to have a confident internal count.
At the moment I can only make a wild guess that at Friday's lod price has completed:
a) The wave (3) of the wave (C) or of a larger impulsive sequence ?.
b) The wave (5) of a larger impulsive sequence?
c) Given that the first down leg is a questionable Leading Diagonal price could also be involved in unfolding the first down leg of an Ending Diagonal.
Therefore the short-term count that I have labeled in the 5 min chart below has to be taken with a grain of salt.
What I can say is that:
- Only if price recovers above 1439.30 then we can consider completed the first down leg.
- The bounce should be capped at the 20 d MA, which stands at 1449.
But with TRIN at 2.54 and an extreme high reading of CPCE the odds of a rebound are large.
NDX will most likely play a major role in sentencing the length of the assumed SPX wave (C) down.
In the weekly chart below we can see that price is already approaching the trend line support in force since the October 2011 lows with an Inverted Hammer (Beware of the potential warning of a bottoming candlestick next week).
If the trend line is breached then we have a potential bottoming target in the range 2650 - 2585.
In the daily chart below we can see that on Friday price has reached the trend line support off the October 2011 lows with a Black Marubozu and an eod print below the Bollinger Band, therefore I would not rule out that next Monday we could have a small range body and even an attempt to achieve an oversold bounce.
If the trend line is finally breached then the target box for the wave (C) of (Y) should be located in the range 2660 - 2609.
Next I want to show the daily chart of the USD Index since in my opinion strengthen overwhelmingly my intermediate bullish bias for the equity indices.
- The USD Index established a short-term bottom on September 14 (At the same time that SPX established a short term top)
- The following rebound is unquestionably corrective.
- We have a bearish cross of the 50d & 200d MA.
- If price is able to extend the bounce towards the 200 d MA then we could have a huge H & S pattern with a potential target at 73.20
- Regardless of the H&S project once the current bounce is over I expect the resumption of the down trend which will coincide with the resumption of the intermediate up trend for SPX.
- My bullish intermediate outlook remains unchanged.
- If the DZZ count off the September 14 high is correct in the worst-case scenario I expect a bottom at the 0.5 retracement = 1371 which will open the door to the resumption of the intermediate up trend.
Now we have to pay close attention to sentiment and technical indicators.
Regarding sentiment, which is a contrarian indicator, we have the AAII Bull ratio approaching extreme bearish readings.
In the technical front:
- The daily RSI is back below the 50 line increasing the probability of further declines.
- The Stochastic is on the verge of triggering a new sell signal. There is plenty of room to the down side before it enters the oversold zone.
- The weekly stochastic of the Summation Index has not reached yet the oversold zone.
- The McClellan Oscillator has reversed to the down side and is now back below the zero line, but in order to expect at least a move towards SPX 1396 we need to see a substantial deterioration of the Oscillator.
Lastly, finally VIX has made the expected move higher. On Friday it jumped 13.50% closing below the upper Bollinger Band at the September 26 peak, therefore it is still in a range.
It needs to decisively break above 17 in order to expect SPX to break down the pivot support at 1422.
Above 17 we have stiff resistance in the range of 17.88 (200 d MA) and 17.98 (September 5 gap down).
Next week we have the FOMC on Wednesday, but I think it is now a non-risk event, while AAPL earning release on Thursday is probably the main risk event for the coming week.