SPX: Follow Up of the Short Term EWP
At the end the bearish momentum and breadth indicators (Absence of positive divergence of the RSI and a new lower low of the McClellan Oscillator) weighed much more than a potential reversal pattern that was hanging by a thread.
In yesterday's update, I was giving more odds to a countertrend bounce: "In my opinion the odds of a bounce remain larger than an extension to the down side, although the "ideal" set up would be continued weakness into OPEX day and a rally next week."
Instead now the latter option should be the correct one.
I maintain the overall count off the September 14 high, which calls for a Triple Zig Zag, therefore as can be seen in the daily chart below, price is now involved in unfolding the wave (A) of the third Zig Zag.
Going forward as long as bulls do not reclaim the 200 d ma the current wave (A) will most likely not be over.
In addition yesterday's candlestick does not suggest that a bottom is in place.
So now I am working with to counts for the down leg off the November 6 peak.
- Primary Count:
SPX has not completed yet the EWP (TZZ) of the down leg off the November 6 peak, in which case a weak bounce should be followed by the last wave (c) down with a potential target in the 1340 area.
Once the EWP is done I expect a multi day-rebound wave (B).
- Alt Count:
SPX at yesterday's lod has established the bottom of the wave (A).
If this is the correct count then price in the following days will carry out a "strong" countertrend bounce with a target in the range 1391-1403.
I give to this option a low probability of being the correct one, as long as bulls don't reclaim the 1375 area.
Due to the extension of the current down leg probably the bottom of the correction from the September 14 high will be closer to 1325 than 1346 (=0.618 Retracement).
Obviously now daily RSI and Stochastic are both in "extreme" oversold territory; hence SPX is now closer to a relief bounce.
The McClellan Oscillator now is extremely oversold.
But instead of gassing for a bottom I would wait for a bullish signal cross of the Stochastic and an improvement of the Oscillator at least above its 5 dma = -55.57.
Regarding VIX, the pattern is a complete chaos.
Despite yesterday's surge, I don't see strength of the RSI and the bullish divergence for equities is still clearly evident.
Instead of trying to guess what is the "fear index" suggesting I prefer to follow VXX since maybe here there is a potential contracting pattern is progress.
If this Triangle plays out then my primary count that I have explained above should be on track.
Lastly if weakness persists until Friday's OPEX then the multi-day rebound should begin next week (Thanksgiving shortened week is usually bullish biased).