In my last weekend analysis I discussed 3 possible patterns that described the price action off the August lows:
- Flat wave (B/2)
- Triple ZZ wave (B/2)
- Ending Diagonal wave (C)
The Flat idea was aborted since the up leg off 1114.22 proved to be a 3-wave up leg while an impulsive move was needed for the assumed wave (C) up.
The Triple ZZ option, in my opinion, is also not feasible because this week's decline is a corrective mess, unless it traced a LD wave (I).
Given the recent price sequence of lower highs/lows within a potential converging pattern the Ending Diagonal wave (C) scenario is now my primary count.
Price is on track of validating the pattern as long as it remains below the upper wedge line and establishes a double bottom or below 1101 SPX with a potential "overthrow" of the lower wedge line.
In addition the final assumed wave (V) of the ED requires capitulation / selling exhaustion (Daily TRIN > 2; NYSE TICK = < -1000... etc.) and positive divergences of momentum (RSI) & breadth indicators (Summation Index; BPI)
If the ED pans out with bullish divergences I will have enough confidence to consider a potential intermediate bottom that should lead to a multi week rebound within a potential larger Zig Zag that could complete a corrective pattern off the July's peak.
The Russell 2000 is tracing an interesting pattern that is suggesting a corrective price structure off its April's peak therefore the intermediate trend should be still up.
In Europe it will be vital that the DAX confirms with a corrective pullback that it has already bottomed. For this reason I don't want to see price breaching the horizontal support at 5218.
Here my primary count calls for a wave (C) already in progress that has a potential target in the area of 6400
Next week we have plenty of economic data. Main focus on Monday with ISM manufacturing Index and NFP on Friday.
