Weekly Technical Analysis
I EXPECT MORE UPSIDE BUT A LOWER HIGH
SPX ended the week with a Harami candlestick which strengthens the probability that the down leg from the August peak has run its course and price is now embarked in a countertrend rebound which eventually will be sold establishing a lower high and opening the door to at least one more down leg with a potential target in the range 1597 - 1560 (I will be also watching the rising lower BB which is now standing at 1576 as a potential target)
Initially the current bounce could stall in the range 1671 (10 wma) - 1680 (Horizontal resistance).
I will maintain a short-term bullish bias as long as next week price remains above the 20 w ma = 1647.
Since on September 18 (8 trading days left) we have the FOMC day (Tapering not Tapering or light Tapering), barring an escalation of the geopolitical risk in Syria it seems probable that the expected next down leg will not begin before Bernanke's announcement. So we should be prepared for fireworks since we will also have the Quarterly OPEX the following Friday.
Despite the down leg from the August peak can be counted as impulsive for SPX and the Dow, it is not the case for NDX, which is hovering back at its August's peak. Neither the Russell 2000 nor the XLF have unfolded an impulsive decline, and in Europe, the DAX also has a clear 3-wave down leg, therefore even though I will remain open minded, so far the long term trend (From the 2009 lows) is not in danger of being reversed.
If this is the case SPX should be unfolding a corrective pattern that will establish the wave (4) of (Y) with a potential target in the range 1597 - 1560. If this scenario pans out then the last wave (5) up should conclude the Double Zig Zag from the 2009 lows opening the door to a major retracement.
Therefore as long as the current pullback remains corrective (3-wave /7-wave down leg) and price does not breach the trend line from the October 2011 low (The rising 200 dma which today stands at 1567 could be a potential target) I expect the resumption of the intermediate up trend with one more up leg that will establish another new ATH.
Friday was an extremely volatile day. The swift moves in both directions have left in the daily chart a Doji (A sign of indecision), delimiting the short-term resistance (50 d ma = 1665) and support (10 d ma = 1646). This is the battlefield that will determine if the current bounce has more business to the upside (Target range 1670 - 1685) or if bears resume the downtrend off the August peak with another down leg.
I will be watching the slope of the green line (3 d ma), which now is positive for clues of the next directional move.
The pattern off the August 28 low is a mess of overlapping waves. Probably it is not done yet.
I can guess (50% confidence) that price might be unfolding either a 11-wave pattern (TZZ) in which case the current pullback off last Friday's hod should hold at the rising trend line should or it should not breach the 50 h ma = 1646 (It coincides with the 10 dma) or a Zig Zag in which case price is now unfolding a wave (B) pullback which must not interrupt the sequence of higher lows from the August 28 short term bottom hence a drop below 1640.59 would jeopardize the short-term bullish case.
Bulls will encounter a tough resistance in the range 1667 (Downward slopping 200 h ma) - 1670 (0.5 Retracement - August 26 lower high).
There is a remote chance that 1670 could become the neckline of an Inverted H&S. An extremely bullish pattern that would allow price to revisit the August high.
Friday's low reading of CPCE is increasing the probability of a larger pullback off Friday's hod.
Daily momentum has to maintain alive the short-term bullish bias. It is a MUST that the RSI does not reverse to the down side at the 50 line.
Also we have to watch the MACD, which is at a critical stance, a bullish cross or a failure will dictate on the short-term path.
Usually the Stochastic, which has crossed its 50 line should reach the overbought line as well as the RSI (5) which in addition should show a negative divergence when the current corrective pattern is done.
Recent positive momentum will also have to be ratified by the breadth thrust of the McClellan Oscillator, which should remain above the Zero line. A negative divergence of the MACD histogram will be a serious warning that price is approaching a reversal area.
Lastly we have to monitor the weekly Stochastic of the Summation index since a weekly bullish cross from the oversold zone would most likely result into a much larger move to the upside, an outcome that at the moment the current pattern is not suggesting.