SPX: Follow Up of the Short Term EWP
BULLS ARE REGAINING THE UPPERHAND
A sudden improvement of key geopolitical risk, good numbers from China and the belief of a light tapering have switched on risk appetite.
I was expecting a larger bounce within the scenario of Zig Zag down from the August high, in other words I was considering the up leg off the August 28 low a wave (B).
While still possible, this scenario now it is less likely since both momentum and breadth is not aligned anymore with the short-term bearish case.
It is unusual that price is unfolding a wave (B) when the stochastic of the Summation Index is issuing a "Buy signal". Most of the times a bullish cross from the oversold zone can result in a bullish outcome for the SPX for en extended period of time (multi-week time frame).
Nor it is common that price closes above the 0.618 retracement and the 10 d ma has now a positive slope, if a wave (B) is underway.
Therefore, even though the gap that most of us were looking has not been filled yet (But SPY has closed it), now the burden of proof is on the bears since it is likely that the market behaviour has shifted from selling the rip to a buy the dip.
If this is the case bulls have to successfully defend the 50 dma which today stands at 1668.
The question now is if bulls will be able to maintain this impelling force as we get close to the FOMC meeting (Next Wednesday) and quarterly OPEX.
If this is the case instead of a downward Zig Zag bulls could achieve an upward Zig Zag that could still establish a lower high (Maybe price could be forming a Triangle).
It is also odd that the daily MACD has a new bullish cross and the RSI has easily crossed the 50 line.
Clearly though, this quick and sharp rally is short term extended, with the RSI (5) at 83 and the Stochastic which has crossed the overbought line, hence for the immediate time frame the probability of at least a short-term pause is large.
Also the extreme low reading, reached last Monday, by the Equity Put/ Call ratio is suggesting an overcrowded bullish environment. This is a contrarian indicator.
It remains unquestionable that from the August 28 low price is not unfolding an impulsive pattern therefore this up leg can be either the bearish wave (B); Black label, which is now less likely, or the wave (A) belonging to a Zig Zag up; Blue label.
In my opinion the TZZ option remains the best count. And it is also possible that a small wedge with a marginal higher high has concluded it. But this is not important now. What really matter is the extent and character of the following pullback. If it is a short-term pause the assumed wave (B) should not breach the rising trend line.
Probably at the 200 h ma = 1664 we will "see" dip buyers
Going forward I will be watching if the 50 h ma crosses above the 200 h ma in which case additional significant gains will be in the cards.
Regarding the long-term EWP, if the Zig Zag up pans out, price should be involved in the final stage of either a Double Zig Zag or a Triple Zig Zag:
- Double Zig Zag Option:
- Triple Zig Zag Option: