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SPX: Follow Up of the Short Term EWP

By: TheWaveTrading | Tuesday, November 20, 2012

On Sunday I mentioned: "Therefore the extreme oversold readings of breadth & momentum Indicators + logical level for a short-term bottom (0.618 Retracement) + reversal pattern are the "ingredients" that should allow a multi-day rebound."

I also said that: "A weak bounce should fail at the 200 dma while a strong one will go deeper inside the box and two trend lines resistance could come into play."

Well Bulls yesterday reclaimed back the 200 dma with a strong move that overshadowed the initial extension target that Friday's "infancy" stage of the countertrend rebound was suggesting.

So now we have the confirmation that the "oversold" rebound is a strong one, and it will most likely extend its course during the shorter Thanksgiving week. Probably next week investors will realize that there has been no catalyst that justifies the end of the corrective pattern from the September 14 high.

Below in the daily chart I keep highlighting the target box where the assumed wave (B) should top in the next few days. The range is now: 1389 - 1400, in addition there could be a temporary overshooting above the broken trend line from the October 2011 lows.

Once the wave (B) is in place I expect price to carry out the last wave (Z) down which could match the 89.1-drop of the last wave (A). Hopefully this pending wave down will establish a major bottom, if it is confirmed with positive divergences.

Yesterday SPX ended with a white Marubozu. Usually the following day price should consolidate the gains hence a small range body is expected. It remains to be seen if bulls will be able to achieve a second consecutive day above the 200 dma.

SPX Daily Chart
Larger Image

We have also to keep in mind that this week usually has a bullish bias.

The low reading of CPCE is also favoring at least a mild pullback.

CBOE Options Equity Put/Call Ratio

In addition to the EWP, which at the moment is not properly defined, I suggest to pay a close attention to the McClellan Oscillator.

So far, a breadth thrust is clearly endorsing the countertrend move, so we have to wait for a deceleration of this bullish inertia in order to look for a reversal pattern.

Usually, like price, the oscillator unfolds a 3-wave up leg; hence we already know that odds are very large that price has not completed yet the "oversold rebound".

We also know that if the scenario of a countertrend move is the correct one the oscillator should not break above the November 6 peak.

NYSE McClellan Oscillator Chart

Friday's "perma bears" that are today's " perma bulls" should monitor closely the EUR since in my opinion the internal structure of the rebound off the November 13 lod is clearly suggesting that in the near future price has more business to the down side.

So far bulls here are struggling to reclaim the 200 d ma, which coincides also with a strong horizontal resistance, while slightly above there is the steep declining 20 d ma.

Barring "good news", with the current weak structure, which could be shaping a bearish Flag, price should reverse in the range of the Trend line resistance in force since the October 17 high and the next horizontal resistance at 1.2876.

Euro Daily Chart
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Lastly VIX could remain under pressure during this week, the Stochastic has not entered yet the oversold zone, but lets watch the lower BB of the envelope, since an eod print above it could trigger a sell equity signal.

If the speculative trend line support is breached the next support is located at 14.50 then we have the Huge Trend line that connects the sequence of higher lows in force since the August 17 low.

VIX Daily Chart
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Author: TheWaveTrading

TheWaveTrading

Contact: If you would like to contact the author, you can e-mail him at thewavetrading@gmail.com

The main objective of this project is to share my views on several markets and asset classes.

In the initial stage TWT website will be a free service.

My main focus will be the equity market with SPX being the leader but I will also follow US equity sectors, major European indices, fixed income, currencies and commodities markets.

My analysis is based upon traditional Technical Analysis, Elliot Wave guidelines and investor sentiment.

My goal is to establish the most likely path that the price of a particular asset will undertake and profit through ETF instruments both on the long and short side and mainly with leveraged ones (2 x & 3 x).

The advantage of ETF investments is that it allows getting involved in equity indices & sectors, currencies, fixed income, commodities etc.

Therefore the main purpose of TWT will be to establish investment strategies regardless if the market is in an up trend or in a down trend, leveraging the chosen scenario while managing the risk by establishing protective stop losses.

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