Weekly Technical Analysis
THE PATTERN FROM THE SEPTEMBER 19 HIGH IS NOT OVER
An Engulfing candlestick has followed the "FOMC" weekly Shooting Star. It could have got worse if bears achieved to close the weekly gap at 1687.99 However despite the weekly negative price action bulls were able to save the gap and avoid an eow print below last week low.
We don't have a bullish candlestick, hence the decline form the September 19 low is probably not over yet.
A weekly close above the 3 wma which stands at 1697 would improve the price pattern while if the weekly gap does not hold the next support is located in the range 1579.50 (10 wma) - 1576 (5 wma).
The moving averages set up remains bullish (slopes are positive)
As I have discussed in the weekly update on September 16 we have visible evidence of slowing momentum. The bearish divergences of the weekly RSI and MACD, % of stocks trading above the 200 dma, Summation Index and BPI are strongly suggesting that price could be involved in the late stages of the corrective pattern unfolded from the 2009 lows.
I also suggested that if we are approaching a major top price could be forming an Ending Diagonal. In a Double Zig Zag (it is my preferred count of the advance from the 2009 lows) an Ending Diagonal appears as the final wave (C) = (Y).
If this is the correct ending pattern the current pullback is the wave (IV), but it needs to be larger. If the 50 dma holds the Ending Diagonal option will not pan out.
The RSI of the Summation Index has entered the overbought zone. Therefore as long as the bullish cross over (Index crosses the 10dma) issued at the beginning of September is not reversed during the current pullback, it is obvious that odds favour an ending move more than the beginning of a new one.
In order to maintain this scenario alive, we need to see an improvement of the McClellan Oscillator, which is dangerously approaching the zero line.
The absence of a positive divergence of the Oscillator and the MACD histogram last Friday suggests that the correction is not over yet. It looks probable that, either after a bounce or straight away, the Zero line will not hold. If this is the case a bullish set up could occur with a drop below the lower Bollinger Band (A positive divergence of the MACD histogram would be welcomed).
Daily Momentum is also concerning, above all if next week the MACD confirms a bearish signal cross. If this is the case more weakness should be expected probably until the Stochastic and the RSI(5) enter their oversold zones.
Therefore it seems likely that we need to see extremes in short-term breadth/momentum indicators (Better if with positive divergence) in order to consider feasible a tradable bottom.
Bulls have another issue with the IHS of VIX. Friday's spike has most likely confirmed the pattern (As long as the neckline is not breached). The IHS has a target at the upper Bollinger Band. If target is reached we could have a buy equity BB signal set up (Close above the BB followed by a close below it).
Two things could favour a bounce:
- CPCE has flipped from bearish (On Thursdays eod print) to bullish (Friday's eod print).
- Daily Hammer candlestick. Despite price has reached the target box delimited by the Fibo. retracements, I remain sceptical that the pullback off the September 19 high has run its course. However we cannot rule out a short-term bounce which should have an upper limit at 1709.67.
In my opinion we have two potential patterns:
- Ending Diagonal. Barring a truncation it needs one more lower low (Caveat: the wave iii of the assumed ED is marginally larger that the wave i).
- Triangle: We should see an impulsive decline off last Thursday's gap down. The theoretical target is located at 1667.
This scenario should conclude the corrective pattern from the September 19 high.
Next week seasonality is bullish.
The economic agenda has plenty of data to be released, the main one is NFP next Friday.