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Weekly Technical Analysis
My short-term scenario has proven to be wishful thinking. I was looking for a potential Zig Zag down instead bulls have once again aborted a pullback that in my opinion has been delayed but not removed from a pending outcome.
Regarding the long-term count I maintain the scenario of a potential Ending Diagonal. If it pan out it will complete the Double Zig Zag wave (X) off the March 2009 low establishing a major top.
But instead of a expecting a larger subdivision of the wave (III) maybe price is approaching the end of this wave.
If this is the case then once the wave (III) is in place the next down leg, in order to be considered the wave (IV) of the Ending Diagonal, it will have to overlap below the peak of the wave (I).
The potential target for the wave (IV) could located in the range 1463.76 - 1435.50.
Where could be located the assumed wave (III) top?
If we look at the monthly chart we have a potential range 1517.68 - 1530.
- 1517.68 = August 2000 eom print.
- 1530 = September 2000 peak & May 2007 eom print.
I cut down the target of the current up leg and consequently I expect a large pullback instead of a "mild "one due to the following reasons:
- Sentiment is reaching extreme bullish readings as can it can be seen on both the AAII Bull Ratio and the NAAIM Survey:
Sentiment is a contrarian indicator. It is useful in signalling pending corrections/trend reversal but it is not a timing indicator, therefore it has to be gauged in conjunction with breadth and momentum indicators.
a) AAII Bull Ratio:
b) NAAIM Survey of Manager Sentiment
- Breadth indicators such as the Summation Index (weekly stochastic is extremely overbought) and the NYSE % of stocks above the 50 dma have reached overbought readings that usually have been signalling a pending high.
a) Summation Index weekly: Usually when the weekly stochastic issues a sell signal price begins a multi-week/month correction.
b) NYSE % of stocks above the 50 dma. On January 22 this ratio reached 89.54%, the second highest reading during the last three years. In addition we can see that it is now showing a negative divergence.
In addition if the Dow is unfolding the same ending pattern, then the wave (III) cannot exceed above 14089.64 therefore there is not much more upside left in order to maintain valid this option.
If this scenario pan out then a multi-week correction should allow the appearance of negative divergence in the weekly RSI in the last up leg of the ED, which will substantially increase the odds of a major top. (By the way the weekly RSI is already showing a negative divergence vs the September peak).
Regarding the short-term price action I have given up to attempt to count the up leg from the November 16 low for obvious reasons. Instead I am watching the price behaviour inside a channel that has the upper trend line which on Monday will be located at 1518,40 +/- and rises 2,25 points each day. While the rising 10 d ma defines the lower trend line, which on Friday was located at 1499.
Therefore either I detect a reversal pattern at the upper trend line or I wait for the loss of the 10dma in order to increase the confidence that price will begin a meaningful correction, in which case if the scenario of the Ending Diagonal is correct the assumed wave (IV) could bottom in the range 1464 - 1434.
Just as a guessing exercise below I show 3 potentials counts:
- The top of the assumed wave (III) is in place. Since the pullback off Friday's hod is corrective then price should unfold a Leading Diagonal in order to strengthen the scenario of a large wave (IV) pullback.
- Or maybe price could be unfolding a Triangle wave (4). Once it is complete the post thrust should establish the top of the assumed wave (III).
- Or price is on the verge of finishing an Expanded Ending Diagonal (If the upper trend line is not breached)
Even though the price pattern remains difficult to decode, daily momentums is strongly suggesting that if a top in not already in place it should be around the corner (of course if Ben and friends don't fix this issue):
- RSI with negative divergence
- Stochastic with a sell signal in play
Also VIX, which is once again diverging from SPX, in my opinion, is not so bullish friendly.
Here we could have either a higher low or a potential Double Bottom. If a Double bottom the target is at 16.60, but as nobody in this planet thinks that the equity market can drop I would not rule out a move towards the 200 dma = 17.19
In addition watch the Bollinger Bands, they are getting tighter, and it usually auspicate a large move.
Lastly and this has also to do with conspiracy theories, on Friday we had a "strange plunge of TLT, which closed with a drop of 1.52% TLT is a widely watched etf (20+ Year Trsy Bond Ishares).
Lately there is a lot of talking in the media regarding the Bond market "bubble" as it seems that THEY desperately need a rotation of funds out the bonds into the equity market to keep the "creeper" equity uptrend alive.
But I say, would you sell your bond allocation and buy the Dow at the all time high?
Instead of watching the TLT that probably can be manipulated I prefer to follow the US 10 year Treasury Note Future.
Here the corrective EWP from the July top is most likely not over, but if the count that I am working with is correct (Double Zig Zag) price could be on the verge of beginning a large wave (B) rebound.
Regarding TWT swing picks I remain "trapped" long of SPXU with a loss of 2%. Next Monday I will decide what to do with this position.