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Daily Analysis

Reminder of the short-term EWP:

I reiterate from yesterday's post:

"I expect that price is now in the process of completing a Zig Zag from the October 4 low. Once the ABC is completed, I expect a multi-week corrective EWP. Therefore as long as price does not breach substantially the 200 dsma = 1260 the trend will remain up."

  • The mentioned Zig Zag will be completed once the 5 -wave up leg from the November 25 low is done.
  • The final impulsive or Ending Diagonal wave (5) is already in progress.
  • The projected target, if the extension 1 x 1 is accomplished, is located at 1148.48

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Short-term price action:

We have atm a 3-wave up leg therefore in order to consider that price has completed the EWP one more impulsive/ending diagonal wave (5) is required.

A technical feature stands out since the third wave cannot be the shortest; therefore we know that the pending wave (5) cannot exceed 30.48 points.

Another issue to take into account is that the wave (2) pullback lasted only 1 day and it was very shallow, therefore the assumed current wave (4) correction has to be completed today, unless a triangle were in the cards. In addition price should not breach the 1386 area otherwise price could be unfolding something else, maybe another Ending Diagonal.

If this count is correct then once we have the wave (4) in place we can add 30.48 points and we get the maximum allowed target for the pending wave (5). It seems too easy to be true.

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Therefore if this count is the correct one the equity market is approaching potential intermediate tops that will be open the door to a multi-week correction.

But again is it going to be so easy?

Let me tell you that since we are not in a free market I remain sceptical and as always price will dictate. The odds will definitely increase once the current fiver is finished. But a catalyst will be needed.

In the technical front:

Yesterday I mentioned that breadth had improved considerably, judging from the NYSE 10 d adv-dec volume, there has been strong buying power behind this up leg:

In addition today we also have a new buy signal issued by the MACD, while the Stochastic is entering the overbought zone and the RSI has reached a trend line resistance in force since mid February.

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In will be interesting to see an increase of the AAII bull ratio (It should be released today), since intermediate equity tops are usually accompanied with extreme bullish sentiment.

Lets also monitor VIX for clues since, as I mentioned yesterday, the odds of at least a large rebound towards the 18 area are very large.

Also If SPX is approaching a meaningful top we should see weakness in the financial sector. Below I have a potential count of KBE, which calls for a Triple Zig Zag that can be counted as completed/almost completed

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And don't forgets the EUR that could have established an intermediate top ahead of SPX.

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Here if a top is in place then down side action has to be impulsive, unfortunately the third leg down seems to be wedging and the daily Stochastic is extremely oversold, therefore I would not rule out an attempt to muster a large rebound, maybe shaping the right shoulder of a bearish Head & Shoulder. If a rebound occurs we shall see how price behaves at the 20d & 50 d MA.

And lastly an probably the most important issue occurred this week is the potential price reversal of the treasury market, that together with the strength that the USD is displaying, it could reflect a major shift of the financial market perception regarding a less accommodative FED policy in the near future. But at the moment it is only a speculation.

On the other hand it could be another manoeuvre of the FED with the objective of inducing risk-taking flows into the equity market.

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The major event left for this week is tomorrow's quarterly OPEX, sometimes it has been a "turning window".

Tomorrow I will be leaving for a long weekend skiing break; therefore I will not publish updates until next Wednesday.


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