Weekly Technical Analysis
NEXT WEEK ALL EYES ARE ON THE EUR AND THE DOW
Despite all the reasons I have discussed lately without a lower high there will not be a guaranteed trend reversal.
Bears have the opportunity to inflict technical damage if they are able to take advantage of a potential impulsive decline from last Wednesday's peak, in which case price would be involved in unfolding a large 5-wave down leg (The current bounce would be the wave 2).
But even if last week's down leg was not impulsive the overlapping internal structure of the current bounce still suggests that price from last Wednesday's top has began a corrective pattern that should unfold a Zig Zag / Double Zig Zag / Triple Zig Zag (The current bounce would be the wave B).
Usually a counter trend bounce (wave 2 or B) stalls in the range of the 0.382-0.618 retracement of the previous down leg. But in a "strong" uptrend, the 0.786 retracement can come into play. The difference between a wave (2) and a wave (B) is that the former cannot move beyond the starting point of the wave (1), while a wave (B) can even top beyond the beginning of the wave (A).
As a general rule of thumb above the 0.786 retracement instead of a large impulsive decline a corrective option could become the most likely scenario.
Below in the SPX 15 min chart we can see that the internal structure of the current rebound is suggesting a 7-wave up leg (Double Zig Zag). If this count is correct the projected extension target (1x1) for the wave (Y) is at 1519.40.
If the wave (Y) extends higher or the pattern morph into a more complex one the 0.786 retracement or the trend line of the assumed completed Ending Diagonal should deter a revisit of the previous high.
Next Mondays "all eyes" will be watching the Dow since last Fridays it closed at only at 57.70 points below the previous high.
Friday's candlestick is a white Marubozu, which is suggesting that a top is not in place yet. A white Marubozu is usually followed by a small range body, hence probably by the eod will have clues regarding the potential trend reversal. In the case of the DOW we can see that the Bollinger Bands are narrowing hence a large move should be expected.
If price confirms the trend reversal by breaking below last Thursday's low then there is only "white space" until the September's peak at 13653.24, hence I expect a quick drop towards this area.
Another major reason that favours the bears is that it would be extremely rare that last week rally of the VIX were only one up legged move. So odds favour the establishment of a higher low and which will be followed by at least one more up leg that should reach the range 16.89 (200 dma) - 18.02 (January 2 gap down).
Therefore next Monday equity bears need a reversal preferably no lower than the 20 d ma = 13.35.
Equity Bull's wild card is a major rally of the EUR next Monday. Even though EW wise it is possible since from the February 2 peak we can count a 7-wave down leg (Maybe if price completes a potential small wedge during the Asian session).
A 7-wave down leg can be counted as a finished Double Zig Zag, which could open the door to a large rebound. But on the other hand the confusion surrounding the results of the Italian elections reduces the probability of this scenario (Polls will close tomorrow at 14:00 cet). Hence even though a bounce is possible maybe the DZZ could morph into a TZZ.
In addition, as discussed last week, price could have formed a H&S pattern with a target at 1.2885.
Even if the overall pattern form the February high is corrective I doubt that price is establishing a major bottom.
Anyhow the EUR pattern and the reaction to the Italian elections can become the major hinder for the equity bears aspirations.
Lets move on to review the SPX charts, where I maintain both the short-term and long-term scenarios.
- Short-term scenario:
Last week Ending Diagonal, once/if a lower high is in place, will have completed with a double Zig Zag the up leg off the November lows.
If price in the coming weeks breaches the September peak then last week's high should be the wave (III) of the Ending Diagonal option.
If this is the case the wave (IV) should bottom in the range 1459-1437.
In the weekly chart below I show you the Ending Diagonal scenario:
Since the October lows SPX has had 2 major pullbacks, the first one, from the April's high, price retraced almost to the 0.5 Fibo.; the second one, from the September's high, price retraced lower than the 0.618 Fibo. Lets see if the third one reaches the range located in the range of the 0.382-0.5 Fibo.
- Long-term scenario:
If the Ending Diagonal pans out then, EW wise, the Double Zig Zag wave (X) off the November 2008 low will be completed hence it can open the door to a major decline with the wave (A) of the second Zig Zag From the 2000 top.
Regarding the technical front:
- The Summation Index has issued a weekly sell signal. Usually the next buy signal should occur when the stochastic drops to the oversold zone:
- The McClellan Oscillator keeps establishing lower Highs/Lows. Therefore if the current equity bounce is expected to fail below last Wednesday's high the oscillator must not breach its last lower high at 7.74.
- Daily momentum indicators are aligned with the scenario of a larger pullback. If this is the case the stochastic must not cancel the bearish cross issued last Tuesday while the RSI will have to break down the 50 line during the expected SPX wave (3) or (C).