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Weekly Analysis

Long term time frame EW pattern

Nothing substantial has occurred from my last weekly analysis (12-12-2011) that should modify my preferred long term scenario that calls for a large and complex corrective pattern from the July's "potential" nominal high:

"...By no means we can consider that the "Hope rally" that began off the March 09 low is completed. The fact of the matter is that we don't have evidence that a bearish resolution is in the cards yet, instead price could be involved in tracing a large corrective pattern that has more work to do before a top can be considered in place. In this respect I am "working" with a potential wave (B) or (X) in progress that is expected to trace a Zig Zag off the October 4 low. If price achieves the equality extension target, within the Zig Zag, then price will most likely revisit the summer highs before rolling down. When this potential EW pattern is completed then we will be able to focus on the down side as price could have as a magnet the 1010 area."

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On January SPX ended the month with a second consecutive Doji. It is true that the monthly candlestick describes "indecision" but 2 technical issues can be considered bullish:

  • 100 m MA has acted as support.
  • Bullish cross of the 3 & 6 MA.

In the monthly time frame we can now use the 6 m = 1234 as the line in the sand while the "major" resistance is at the trend line off the 2007 top = 1331.5

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Short term time frame EW pattern

My main focus has been, and remains, to succeed in detecting the pattern from the October lows, which, if the overall count is correct, should be unfolding a Zig Zag = ABC

In my last daily analysis on Dec 22 I discussed 3 potential options. Today I am giving a higher probability to the Zig Zag option while the Triangle wave (B) and the Double ZZ wave (B) scenarios are the alternative counts.

1. Zig Zag Option:

If price is tracing a Zig Zag then we all know that the wave (C) has to be impulsive or unfold an Ending Diagonal.

Within the pattern from the October 4 low we have 2 potential price projections:

  • Larger degree:
  1. Wave (C) = Wave (A) = 1376.55
  2. Wave (C) = 0.618 (A) = 1293.31
  • Lower degree: Wave (III) = Wave (I) = 1310.77

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a) Impulsive option:

The impulsive option has a problem since the up leg off the Dec 19 low, in my opinion cannot be counted as impulsive unless price has traced a questionable Expanded Leading Diagonal.

This issue has also consequences for the Triangle and the Double ZZ scenarios.

Therefore if price has traced a "rare" ELD then the wave (II) should bottom in the range between the 200d & 50d MA and resume the wave (3) up.

If this is the correct pattern then the equality extension target will come into play. (C=A=1376)

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b) Ending Diagonal option:

The overlapping subdivision of the up leg off the Dec 19 low is giving a large probability that price is unfolding an ED.

Barring a complex and extend converging pattern the most reasonable assumption is that price is completing the wave (III).

The assumed wave (III) should not be larger then the wave (I), hence it has to top below 1310.77 while the potential target for the completed ED could be located in the area of 1310-1320.

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Below I show the charts of the other 2 Alt. scenarios which both need the Expanded Leading Diagonal to be validated.

2. Triangle Wave (B):

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3. Double ZZ Wave (B):

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To sum up:

  • The pattern off the October 4 low is not completed yet.
  • The ED option is my preferred count with a target in the range 1310-1320
  • A failure at the October's peak, with only a 3 wave up leg, and the loss of the 50 dsma= 1241 will open he door to the Triangle / Double ZZ options.
  • Given the questionable impulsive structure of the up leg off the Dec. 19 low, the Impulsive wave (C) option should have a lower probability.

A key sector in the SPX is the Financials, and the outperformance of the Banks from the November's low in addition to a potential impulsive price structure can alter the conservative target for SPX.

In this respect as long as price does not overlap below 20.08 it is reasonable to consider that price is unfolding the wave (3) of (C) and that price could reach at least the equality target in the area of 22.

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Another other key sector is Technology.

Taking NDX as the proxy for the Technology sector, here the price structure is more complex although the end result should also be a wave (B/X)

I have been and still I am working with a Double Zig Zag.

The equality target seems unattainable; instead the current wave (C) up should at least reach the October's peak.

Also keep in mind that this index has achieved the golden cross in early December.

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In the technical front:

  • Daily Momentum:

We have Stochastic in overbought territory while the RSI has not achieved a higher high above the Dec 7 peak; hence we have some negative divergence, but as long as it remains above the 50 line and the MACD does not trigger a sell signal a price reversal is not expected.

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  • The McClellan Oscillator has a lower high and it has crossed its 10d sma.

  • The 10 dsma of the NYSE adv-dec volume is now pointing down.

The above indicators are suggesting a waning upside momentum therefore odds are high for a pullback.

  • NYSE BPI has a buy signal in place but it is possible that a serious negative divergence is forming; therefore this indicator is suggesting that a top is not very far off.

  • The weekly stochastic (5,3,3) of the Summation Index has not reached yet the overbought zone and it is far from triggering a sell signal hence more upside should be expected.

In the Sentiment front:

  • The AAII bull ratio has reached an extreme reading. This is a contrarian indicator that is also warning that a potential top is not too far off.

  • 10 dsma of CPCE since December 19 has dropped considerably and it has reached an area where in the last 6 months some kind of a top has been established.

  • VIX: the "massive" bullish falling wedge that I have been following could be getting close to a resolution. Keep in mind that at the moment we have a positive divergence of the RSI.

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In addition seasonality is not so bullish friendly for the month of January

Next Monday Alcoa will start fourth quarter earning season while on Friday we will have the report of JP Morgan.


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