Weekly Technical Analysis
ONE MORE DOWN LEG SHOULD COMPLETE A DOUBLE ZIG ZAG
The month of May has concluded with a Dark Cloud Cover candlestick. This candlestick has bearish connotations suggesting that a larger correction should be expected. At this moment I don't know the potential target, but it seems probable that price will at least revisit the June lows where we have two important moving averages the 10-month and the 200-day.
If the June low holds then the trend off the March 2009 low will not be in danger of being reversed yet and we could have a potential huge rising wedge, which should allow another up leg, probably the last one within the corrective pattern unfolded from the March 2009 low.
If the June low as well as the rising trend line from the October 2011 are violated then a much bigger decline should be expected probably in the range of the 20 m ma = 1469 and the horizontal support located at 1440. If this were the case a reversal of the entire advance off the 2009 lows could be underway.
So far monthly momentum indicators remain bullish. It remains to be seen if at the end of September the RSI is still above the trend line in force since the February 200 low and the Stochastic above the 80 line, otherwise the MACD could trigger a long term turning point with a bearish cross.
Weekly momentum indicators are a major concern since the considerable negative divergence of the RSI while SPX was establishing a new all time high at the beginning of August is alarming, as a weekly negative divergence often can derive in a major top.
In addition it would be inopportune for the bulls if the RSI does not hold above the 50 line. There is also a trend line support in force since the August 2011 low slightly above it. The MACD is already testing its own trend line support.
The weekly chart is also discouraging for the bulls since for the first time since December 2012 we have a weekly close below the 20 wma, but as long as the trend line from the November low is not breached it could support a countertrend attack.
If the trend line is breached then probably the April peak at 1597 will come into play. (This level coincides with the measured target of a potential DZZ from the August peak)
Bulls have to reclaim the 10 w ma = 1665 in order to attempt to fix the technical damage.
Short Term EWP
As I have discussed in my last weekend update, in my opinion, price is unfolding a corrective pattern, if this is the case we already know that price is not involved in carrying out a major decline.
My preferred EW count, a Double Zig Zag, remains unchanged. If this pattern is correct price has to unfold one more down leg.
If this is the case, since the down leg from last Thursday's peak is not impulsive, price should be forming a flat, which will be followed by the last wave (Y) down with a potential target in the area of 1600.
The short-term bullish case is a Double Bottom with a target at 1665. In my opinion it is a less likely scenario. (Recall that at 1665 we have the 10 wma)
If the DZZ pans out it will probably establish the wave (A) of a Zig Zag opening the door to a large countertrend rebound.
I doubt that this EWP will conclude the correction as long as we don't see:
1. AAII with a low Bull Ratio
2. A rise of the 10 dma of Put /Call ratio which at the moment remains at a low reading suggesting that despite the equity weakness investors remain too bullish.