Weekly Technical Analysis
I DON'T EXPECT A MAJOR DECLINE
The overall trend is up but market breadth and weekly momentum are suggesting that from the August peak a large corrective phase is underway.
Despite on July 24 I posted an update of the SPX long-term count I want to review the potential pattern.
The initial 3 wave up leg from the March 2009 low to the February 2011 nominal high should have established a straightforward wave (W).
The issue arises from the October 2011 low where price established the assumed wave (X).
The overall pattern has to unfold either a Double Zig Zag or a Triple Zig Zag
1. Triple Zig Zag (11- waves)
a) The wave 11 (Wave Z) is already in progress either with an impulsive sequence or with an Ending Diagonal (Blue count). If this is the case we are now in the wave (II).
In the chart below I show the Ending Diagonal option.
b) The wave 10 (Wave B) has not been concluded yet since price is forming a Triangle (Red count). If this count is correct we are now in the wave (c) of the Triangle
The flat option discussed on July 24 can be removed.
2. Double Zig Zag (7-waves)
If this count is the correct one price is now unfolding the wave (4) of (Y) that should bottom in the area of the June low. Once the wave (4) is in place it will be followed by the last wave (5) up.
Therefore if one of the two counts discussed above is correct I don't expect a major decline. In the worst-case scenario, SPX would retest the June lows.
I have two major reasons why I don't expect a move below the June 24 low:
- If the intermediate up trend is not going to be jeopardized by the current pullback it should not breach the rising 200 dma, which is approaching the June lows.
- The Summation index has dropped substantially and generated a considerable negative divergence while SPX was establishing a new all time high at the beginning of August, but an oversold RSI is approaching the November 2012 and June 2013 readings from where a new buy signal was issued.
Short Term EWP:
In my opinion from the August 5 nominal high to last Wednesday 's lod price has unfolded a 3-wave down leg completing either the wave (A) of a larger Zig Zag or the wave (W) of a Double Zig Zag. The current bounce, which is clearly corrective (wave B or X), should unfold a 3 wave up leg with a potential target in the range of the 0.5 retracement (1674) and the June 15 gap down that could be filled (1685.27). This "oversold" bounce will be followed by further weakness either with a wave (C) or (Y) towards the June lows.
Weekly Momentum is also suggesting that the current pullback has more business to the downside. Negative divergence of both the RSI and MACD and a new sell signal issued by the MACD at the beginning of August are suggesting that the probability of additional weakness in stocks is large. The RSI could reach the 50 line while the MACD should at least retest the trend line support in force since the October 2011 low.