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Oversold XLE into Seasonal Low

Oversold XLE into Seasonal Low

A 40% to 50% retracement…

TheWaveTrading

TheWaveTrading

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…

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Weekly Analysis

Since the December 19 up leg is in force there have been two potential reversal patterns. The first one occurred on the last week of January the second one, with another weekly Spinning Top, could be accomplished next week.

If a top is confirmed then in my opinion price will unfold a corrective wave (4) of (C) with a target in the range 1300-1289 which will be followed by an impulsive/ending diagonal wave (5) that will complete the Zig Zag that began at the October 4 low. If the equality target is fulfilled the wave (C) will top at 1376.


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In an extended move whenever we "see" a weekly small range body we have to be on guard since price may be unfolding an ending pattern.

In the 15 min chart below we can detect an Ending Diagonal, which was completed last Thursday. Friday's gap down and go has established the first step of a potential reversal pattern, now we have to wait for a lower high and another down leg.


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The "ideal" reversal set up would be a bearish H&S if price on Monday completes a Zig Zag shaping the right shoulder.

If this pattern plays out then the target of the second leg down is at 1321, which would imply that the NFP gap will be closed and the bears will have obtained an Island Reversal. Under these circumstances the up leg off the December 19 low will be considered done.


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In addition to the potential reversal pattern this time we have:

  • Daily Stochastic with a new bearish cross but the RSI has to breach the TL 1


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  • The McClellan Oscillator, which has "displayed" negative divergence since the second week of January, has finally dropped below the zero line.

  • VIX, on Thursday, it has finally broken a "worrying" huge bullish falling wedge, which should bode troubles ahead for the equity bulls.


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Although for the immediate time frame Friday's Spinning Top may cast doubts regarding the proposed SPX reversal pattern the fact of the matter is that as long as Friday's gap at 18.63 is not closed VIX has a very likely trend reversal, that should allow at least a move towards the range 24.92 - 26 (gap - 200 dsma).

Going back to my SPX preferred scenario if SPX is on the verge of unfolding a corrective wave (4) of (C) then VIX should not breach its 200 dsma, otherwise "something else is cooking".

So we have the "ingredients" for a reversal, but since this up leg has been persistent in refusing to trigger a pullback we need further confirmation by price that Friday's move is the initial step bound for a multi week correction.

Why am I so cautious?

Mainly because after an explosive move to the upside of TVIX with a 52% gain in just 2 trading sessions, an impulsive up leg may have been completed on Friday. If this were the case I would not rule out a pullback towards Fibo. retracements prior to the next up leg, then SPX reversal may be delayed for a few more days.


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Also Friday's move of CPCE above the BB is not too bearish friendly.

If the "proposed" reversal pattern is once again aborted then probably it will be a matter of just a few days for a larger Ending Diagonal to be completed as can be seen in the Dow chart below:


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This weekend, not a word from me, regarding the long term EW pattern, I want to see my plan to pan out first, below is my "road map":


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