Weekly Technical Analysis
Just as a reminder on January 8 I updated the SPX long-term count.
Since the Flat option has been invalidated I maintain the two Ending Diagonal options:
"The main theme, which I have discussed, in my last long-term count update (October 28) remains unchanged: "From the 2000 Top price is unfolding a Double Zig Zag, therefore now price is involved in completing the wave (X). Once the wave (X) is in place price will begin to unfold the second Zig Zag down towards the 2009 lows.
Therefore I dismiss any bullish scenario that implies a major break out above the 2000 top; instead I maintain the assumption that considers a move back down towards the 2009 lows once the wave (X) is complete.
The wave (X) is by definition a corrective countertrends move hence it has to unfold either a Zig Zag (3-wave) or a Double Zig Zag (7-wave), I am not considering a Triple Zig Zag as a coherent option."
Ending Diagonal Options:
- From the November low price is involved in the final wave (V) of an Ending Diagonal that will establish the wave (A) of the second Zig Zag.
- From the June lows price is unfolding with an Ending Diagonal the last wave (Y). If this is the correct count price is now involved is tracing the wave (III) of the assumed Ending Diagonal. This pattern will complete the wave (X) countertrend rally from the 2009 lows.
Therefore if one of these two scenarios is the correct one price should be approaching (In a few weeks) some type of a top, either the wave (A) of the second Zig Zag from the November 2008 low or the wave (III) of the second Ending Diagonal Option discussed above.
In the following weekly chart we can see that with this week's break out above the September peak we have 2 rising trend lines to watch where price should establish the top of the up leg from the November lows:
- Either the trend line that connects the May 2012 - September peaks = +/- 1503
- Or the trend line that connects the April 2012 - September 2012 peaks = +/- 1530
Once the November up leg is in place I expect a sizeable multi week/month pullback. If it is the wave (IV) of the ED wave (Y) option the pullback could have as a target the 20 w ma = 1430 while if it is the wave (B) of (Y) it could reach the trend line in force since the March 2009 low.
In addition to the proximity of the 2 trend lines that are expected to act as reversal areas the major reasons for a multi-week/month pullback are due to the following technical issues:
- Weekly Stochastic is extremely overbought:
- The RSI of the Summation Index is also extremely overbought. In the chart below we can see that an overbought RSI usually increases the odds of a sizeable pullback:
- Also as I have often suggested the "pendulum sequence" of the weekly Stochastic of the Summation Index that could also be on the verge of issuing a multi-week sell signal:
What is still missing for a large pullback/major reversal is an extreme bullish reading of the AAII bull ratio:
Lets now move on to short-term time frame since here we have the crux of the matter to be solved Elliot Wave wise.
As I have discussed in the daily updates the pattern from the November 16 low is clearly corrective and I have been suggesting that price is unfolding a Double Zig Zag.
Therefore if this count is correct price from the December 31 low is involved in tracing the second Zig Zag.
Since the current up leg (Off the December 31 low) is not impulsive I have to assume that price is still embarked in establishing the wave (A). In addition since last Friday bulls achieved another higher high we don't even know yet if the wave (A) is in place.
Hence since we don't have a reversal pattern yet I can only say that as long as bears are not able to breach the last higher low at 1475.81 price could still crawl higher.
Once the wave (A) is in place I expect a wave (B) pullback with a target in the range 1451 - 1434 followed by the last wave (Y) up-.
The theoretical extension target for the wave (Y) is at 1498 but it go much higher if it seeks the equality with the current wave (A); recall that the 2 trend lines discussed in the weekly chart above could be magnets.
In the SPX daily chart below we can see that if Friday's potential bearish Hanging Man candlestick has established the top of the wave (A) then the bears will have to aggressively provoke a fake break out of the September's peak by reclaiming 1474.51, previous resistance now converted into support.
Once/if the due correction is in progress I guess there will be a lot of dip buyers in the range 1453 - 1451 therefore odds are large that the expected multi-day pullback will be a shallow one.
Next week TLT has to confirm the SPX short-term bearish scenario by unfolding a Zig Zag higher from the January 4 low, while the loss of the January 17 higher low would negate it.
The major technical underlying facts that justifies a short-term pullback are:
- Extremely overbought daily stochastic. In addition if after a multi-day pullback price will unfold one more up leg we should see a negative divergence of the RSI.
- Persistent negative divergence of the McClellan Oscillator. From January 4 SPX has established higher highs while the Oscillator has established lower highs.
- Negative divergence of the NYSE 10 d ma Adv-Dec volume, overwhelmingly evident since last Monday:
- Low reading of CPCE (Put/Call ratio)
Lastly on Friday VIX plunged 8% breaking through the widely watched declining trend line in force since April 2010.
Maybe the thrust down came from a Triangle in which case it could be an exhaustion move. Likewise TLT we should see a bounce next Tuesday if SPX will kick off the expected short-term pullback.