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Weekly Technical Analysis
Due to last week impressive achievement by the bulls I have to reassess my scenario that was calling /for the immediate time frame) one more down leg that was expected to established the end of the corrective pullback off the September 14 high.
Despite the absence of positive divergence of momentum and breadth indicators at the November 16 low and the lack of a spike of VIX, this powerful recovery substantially increases the odds that price has completed in a "funky way" a corrective EWP (Triple Zig Zag) form the September 14 high.
Although it is to soon to rule out:
A more complex pattern if bulls fails at the 50dma (or below the November 6 peak at 1433.38), which would still allow the missing final "washout" below the November 16 low with positive divergences and a spike of VIX.
A large Flat if price brakes above the November 6 peak but fails to break out above the September 14 high.
At the moment I am still doubtful that price has established a major bottom and the intermediate up trend has been switched on.
What seems reasonable is to expect at least a 3-wave up leg off the November 16 low.
In the SPX daily chart below I show the three options:
Blue Count: price will unfold at least a Zig Zag with an expected target in the range of the 50dma - November 6 peak. This up leg could be the candidate to revisit the September 14 high. (Maybe price could be involved in unfolding a large Flat)
Red Count: It is self-explanatory. If bulls are able to maintain the sequence of higher highs/lows then price will have resumed the intermediate up trend within the "bearish" wave (X).
Black Count: The assumed Zig Zag (off the November 16 low) will fail at/below 1433.38, in which case the corrective EWP off the September 14 high will unfold the last wave (Y) down.
A fourth option (Dark Blue), which was until last Thursday my preferred count, calls this up leg an "oversold" bounce, in which case bears will have to reclaim the 200 dma = 1383.
At the moment I give a higher probability to the Option 3.
Before proceeding with the technical analysis lets focus the attention to the immediate time frame.
- Friday's candlestick (White Marubozu) can be considered an exhaustion bullish bar.
- Usually a Marubozu is followed by a small range body (Hanging Man, Doji, Shooting Star)
- On Friday the bullish action has provoked an extreme spike of TICK at 1328 and a low eod print of TRIN at 0.43. This jump of short-term breadth indicators is suggesting that a pullback is due, maybe already next Monday.
- Despite Friday's 18 points rally, the negative divergence of the NYSE Adv-Dec Volume is still in play.
Regarding the labelling of the up leg off the November 16 low I maintain the conviction that it is not impulsive, instead in my opinion price has unfolded a Triple Zig Zag.
Since it is a corrective move, price can trace a larger Zig Zag / Double Zig Zag higher but we cannot rule out either that once it is confirmed over price could unfold the last wave (C) down, revisiting the November 16 low with a double bottom or a lower low.
Hence the internal structure of the expected pullback and the skill of Bulls (with the help of PPT) to defend the 200 dma (eod print since an intra-day drop at the last lower high = 1377 cannot be ruled out either) will determine the next directional move.
Since the internal structure of the up leg off the November 16 low is corrective then if the intermediate up trend has resumed its path higher, within the bearish wave (X), probably the option that price from the June lows is unfolding an Ending Diagonal would be the frontrunner (I posted this option on October 28).
So, so far, the conclusions are:
- This move is "obviously" something more than just an oversold bounce.
- But at the moment since the internal structure of this up leg is corrective we still have several options on the table.
- It seems reasonable to expect at least a 3-wave up leg.
- Bears can only pray that the 200 dma will not hold.
- Thanksgiving's bullish seasonality is ending and due to the "bearish" extremes reached on Friday and a negative divergence of the NYSE Adv-Dec Volume odds are favouring, for early next week, at least a corrective pullback (Since the majority was on holiday the logical behaviour is expected to be buy the dip).
In the weekly chart below we can see the powerful response given by the bulls with the reclaiming of the Trend Line off the October 2011 lows, which ratifies the short-term bullish bias (short term scenario of at least a Zig Zag up).
Since we also have a weekly White Marubozu we should not rule out for the weekly time frame another small range body like the one I have in the chart with the "how" at the 20 wma = 1411.25 and a the "low" maybe at the 200 dma = 1384.
Once/if Bulls reclaim the 10 wma=1418 then the odds that the current move will be able to revisit the September 14 high will increase.
Lets move on to the technical front:
There is an obvious improvement across the board.
- Weekly Momentum:
RSI has broken the trend line resistance in force since the September high and it is back above the 50 line
Stochastic and MACD remain with a sell signal in play. If price has resumed the intermediate up trend we need to see a bullish signal cross of the Stochastic.
- The weekly Stochastic of the Summation Index from an extreme oversold reading has issued a bullish signal cross. This is a positive for the bulls and it usually opens the door to a multi-week rebound.
- The McClellan Oscillator in just one week has moved from an oversold reading to an overbought one (its stochastic has entered the overbought territory). Such a powerful breadth thrust usually allows the kick-off of major moves to the upside. As long as the Oscillator remains above the zero line Bulls will be fine.
- Daily Momentum:
RSI has broken the trend line resistance in force since the September 14 high and it has recovered above the 50 line.
The Stochastic has not entered yet the overbought zone.
The MACD has issued a new buy signal.
Risk-On is also making some progress.
The Risk on risk off indicator made of the ratio SPX vs TLT (20+ year Bond etf) has substantially improved and it could be aiming at the upper Bollinger Band.
The key critical fight should take place in the currency front, with the EUR acting as "Minos" that will endorse the equity bulls' wishes (well lets better say Central Bankers plans) or deprive them temporarily from the victory of the final battle which will allow the resumption of the intermediate up trend.
Unfortunately, in my opinion, the path here is not clear.
Despite the fact that the pattern from the September 17 high is obviously corrective I would not rule out that it is not complete yet.
As a matter of fact the down leg off the October 17 high does not look impulsive therefore the November 13 low is a doubtful "major" bottom, in addition the current up leg is clearly corrective hence there is a "underhand" risk that the EUR could be unfolding a large bullish flag that needs one more down leg if price fails at 1.3021 or a large Flat if price once/if it breaks above 1.3021 it fail at the September high.
For the immediate time frame, on Friday price reached the upper Bollinger Band, hence the move is getting stretched.
As for support we have the 50 dma at 1.2910, while an eod print below 1.2876 would open the door if a retest of the 200 dma = 1.2800.
VIX is probably the best indicator that helps in checking for conformity of an equity move.
I want to highlight two issues:
It is obvious that at the SPX November 16 low there was not enough fear to validate a major bottom for the equity market, instead we had a bullish divergence.
It is also clear that on Friday VIX did not establish a lower low hence we have a bearish divergence for the equity market. But at the same time there is no positive divergence of the RSI, therefore after a rebound that could reach the range between the 50 dma = 16.13 and last Monday's gap down at 16.41 I expect at least another down leg that could challenge the rising trend line support in force since the August lows = 14.10.
If this expected down leg occurs in concordance with a positive divergence of the RSI then it could kick off the awaited spike of the fear index.
Next week the major events in the economic agenda are:
- Tuesday: Conference Board consumer confidence.
- Wednesday: Federal Reserve Beige Book.
- Thursday: Q3 GDP (Second release).
- Friday: Chicago PMI.
We will probably have the end of month (next Friday) + first day of a new month bullish bias.
Regarding the possible CIT dates (Turning windows):
- Negative news from Europe: Any time.
- December 7: NFP.
- December 12: FOMC Meeting.
Lastly I want to wish all the Best for Fernando Alonso hoping for a Miracle.
F O R Z A F E R R A R I !!!!!!!!!