Weekly Technical Analysis
SPX: UGLY WEEKLY SHOOTING STAR
After soaring to a new ATH on Thursday we had a potential exhaustion candlestick. Friday's aggressive selling pressure, reversing most of the FED thrust, culminates the week with a Shooting Star.
A Shooting Star has to be respected since it usually warns the end of an upward move. Odds favours that the Bernanke's rally attempt has been aborted, hence now a mean reversion to the 10 wma = 1679 is a scenario that should not be ruled out.
If next week bulls fail to maintain price above the break out line at 1709.67 (Former resistance now support) then the gap fill at 1687.99 will most likely come into play.
As long as price does not breach (End of week print) the 10 wma, which stands at 1679, the intermediate up trend will not be in danger of being reversed.
Even though it is still premature to consider that the advance from the 2009 lows is approaching an end, as I have recently discussed, the huge negative divergence of the weekly RSI and MCD (Potential triple divergence), Summation Index and the BPI are a major concern (A major top is always established with negative divergences).
Today I show you another concerning negative divergence displayed by the % of SPX stocks trading above the 200 dma. As we can see this breadth indicators is clearly diverging suggesting that less stocks are participating in the up trend.
Therefore the obvious conclusion is that structurally, despite the new ATH, the market is deteriorating.
Regarding the long-term count, taking into account the negative divergences, price could be involved in a topping process. Maybe it could be forming an Ending Diagonal; if this is the case once the Ending Diagonal is done, from the June 2012 low we can count a completed impulsive sequence that could conclude a Double Zig Zag off the November 2008 nominal low.
If price is forming an Ending Diagonal, the current pullback is the initial down leg of the wave (IV) that should at least drop back at the 50 dma. Maybe it could bottom at the trend line support in force since the November low.
If the Ending Diagonal pans out I expect a swift drop towards the 200 dma, which will be the line in the sand for the long-term trend reversal.
Lets move to the shorter-term time frame:
Given the extreme short-term overbought readings reached last Thursday in addition to the weekly Shooting Star I assign a large probability that price has concluded the up leg from the August 28 low.
If this is the case price will begin a corrective sequence of lower highs/lows with a potential target in the range of the 0.382 - 0.618 Retracement. Moreover if we are in the initial stages of the wave (IV) of the Ending Diagonal option the bottom of the assumed wave (IV) will have to be closer to the lower range, hence the 50 dma or the 0.618 Retracement could come into play.
In order to increase the confidence that price has concluded the advance from the August lows we need to see a lower high and the slope of the 3 dma has to turn negative (Any rebound attempt should remain below this short-term moving average).
If the Bernanke's break out fails the initial "obvious" magnet will be the range delimited by the rising 10 dma which today stands at 1698 and the weekly gap at 1687.99.
The market behaviour should switch from buy the dip to to sell the rip.
Friday's huge selling pressure is another bearish signal. The NYSE Adv-Dec volume hit the lowest reading since October 2011.
Usually such a large distribution day suggests that more down side action is in the cards.
In addition seasonality for next week is negative.
Going forward the magnitude of the potential decline will be mostly determined by the behaviour of the McClellan Oscillator. So far the warning of the negative divergence of the histogram of the MACD while the Oscillator was at an extreme overbought reading was flashing a warning. Friday's loss of the 10dma should result in further weakness ahead. If the histogram drops below the zero line bad things can happen.
Also I will be watching the SPX % of stocks trading above the 10 dma as usually if price has concluded the up leg off the August 28 low the next bottom can occur when this breadth indicator reaches the oversold line.
In my opinion the advance from the August 28 low is not impulsive hence it is either the wave (III) of the discussed Ending Diagonal or the wave (A) of a Zig Zag.
So far we have a 3-wave down leg. I don't know if price is unfolding the wave (A) of a downward corrective pattern or it will unfold an impulsive decline before a countertrend bounce can be expected.
At the moment we have positive divergence in the 15 min time frame and an eod print at the former horizontal resistance, hence I expect a bounce that will eventually be sold forming a lower high:
Either here (If on Monday European stocks have a positive reaction to the German elections)
Or maybe at the 50 hma (The loss of the 50 hma will confirm the short-term trend reversal and a likely impulsive decline in progress)
If this is the case the next down leg will most likely fill the weekly gap at 1687.99.
Keep in mind that if price were unfolding the wave (IV) of the Ending Diagonal option a large retracement is needed, at least in the range 1678-1666, otherwise it would most likely be a wave (B) belonging to a Zig Zag higher.
Lastly but probably the major feature for the short-term scenario that will act as the compass for the direction the market is exposed is the behaviour of VIX.
Objectively as of Friday's eod, the doji per se can be considered a muted reaction to the equity sell off. In fact as long as VIX does not break the trend line off the August high and move above 14.68 we cannot expect a meaningful pullback of SPX.