Last week was a bit unusual since despite the equity markets were closed on Friday we had the NFP release with only the Stock Futures and the Bond market open.
The reaction to a lower then expected job numbers sent the bond market higher while ES and NDX futures tumbled more than 1% and finally both future indices breached the trend line support in force since the December 19 lows. In addition both future indices are now below the 10d & 20d MA.
This is a strong signal that the equity market may have initiated an intermediate, multi-week decline.
The logical conclusion to Friday's equity future price action is to consider that the up leg off the December 19 low is over.
Even though so far the technical damage is minor it deserves serious consideration.
NDX has been the leader of the overall market during the rally off the October lows, then if next week the technology Index confirms a reversal, the odds will be very large that at least a short-term top is in place.
Therefore I suggest paying a close attention to NDX. Below I have the daily chart of NQ with 2 potential EWP.
The price structure does not deny the option of a shallow pullback wave (4), since from the November 25 low, I cannot count a clear impulsive move, therefore we might have "only" a 3 wave-up leg; (Black Count).
But my preferred count begins at the August lows and calls for a complex and possibly completed Double Zig Zag which should have established the top of a wave (A); (Blue Count).
If the Black Count is the correct one then price should not drop below the 50 d MA while if we are dealing with the Blue option then the target for the assumed wave (B) is located in the range 2575 - 2472.
Last Thursday I posted on twitter (my twitter handle is @thewavetrading) a potential ending pattern of AAPL.
If the ED plays out then the scenario of a multi-week correction will be considerably strengthened.
Here we have the following key supports: 618.60; 594,72; 568.10.
If the gap at 568.10 is closed then the NDX will most likely be involved in tracing the Blue Count.
Regarding SPX, given the clear 5-wave overlapping EWP from the March 6 low, there is a high probability that price has completed an Expanded Ending Diagonal.
The completed December 19 up leg should imply that the Zig Zag (ABC) off the October 4 low is done. Therefore within the long-term EWP pattern we should have the intermediate top of a wave (A) or this Zig Zag could extend higher morphing into a Double Zig Zag.
But the fact of the matter is that both options would imply a multi-week correction.
For SPX the "road map" to the down side does not have many obstacles: 1386.87; 50 d MA & TL 2 Support = 1370; 1340; 1293 - 1288
Therefore the key supports are 1386.87 & 1340. The loss of the former will open the door for a move towards 1293-1288.
In my opinion the "right look" pullback suggests a move below 1340.
The focus must be maintained on the short-term time frame, which is now at a critical potential inflection point. How much down side is in the cards is not clear, but barring an unexpected bullish response next Monday the odds are now very large that price will begin a multi week correction.
Two major issues are strengthening my bearish bias:
- Even though the US equity market, so far, has indicated unwillingness to begin a " healthy" correction, European markets have already begun to roll over. The DAX which has been a leader of the rally from the Autumn lows and has been tracking the same SPX count should be now leading the equity markets to the down side, as In my opinion this divergence is not sustainable. On April 1, I posted a follow up of the EWP, which is calling for a top; on March 16, of the Zig Zag from the September lows. I maintain the scenario that now price is involved in tracing a wave (B) or (X) with a potential target in the area of 6430.
- On Tuesday the EUR tumbled on the perceived hawkish "language" of the minutes from the recent FOMC meeting. On Thursday I posted a "new idea" which calls for a potential large Flat EWP that may carry price with a wave (B) down to test the January lows. So far there are no reasons to change this option. We all know that a lower EUR usually means "Risk Off".
Pending a confirmation next week, I maintain a bearish stance for the short-term but I remain bullish for the long-term time frame.
I am bullish because in my opinion the EWP of both SPX and NDX suggests higher prices ahead for 2012.
- My SPX preferred count remains the same: Price is tracing the wave (X) off the November 2008 low.
Assumptions:
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The wave (X) is tracing a Double ZZ.
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We are now with a potential top of the wave (A) of the second ZZ.
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Needed weekly confirmation by a print below the 3m MA = 1390.
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The wave (B) should bottom in the range 6m MA = 1330 - 200 d MA = 1270.
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Then the last wave (C) up will establish a Major Top.
- My NDX preferred count remains also unchanged: wave (B) off the October 2002 low
Assumptions:
- The wave (B) is tracing a Triple ZZ.
- We are now with a potential top of the wave (A) of the third ZZ.
- The wave (B) could bottom at the trend line support in the area of 2500.
- Then the last wave (C), up with a potential target in the range 3108 - 3283, should establish a Major Top.
Momentum and Breadth indicators have been warning for some time that price was losing strength.
It is tough to have a bullish stance with NQ momentum "picture":
- RSI has broken the trend line support.
- MACD has issued on March 30 a new sell signal.
We still have an issue to deal with since the down side price action continues to appear corrective. A corrective price structure immediately tells us that higher prices lie ahead.
A corrective structure should not prevent a correction but it is not going to be a "bed of roses" since any impulsive wave (C) down can establish the bottom of the pullback and resume the advance.
Short term oversold extremes will most likely trigger bounces but if weak and corrective then the buy the dip mode will most likely morph into sell the rebounds.
Another issue could prevent a large decline is the oversold reading already reached by the RSI of the Summation Index, but the odds of a realignment of the equity price are in my opinion quite large.
The Summation Index has reversed to the down side on February 9 when it peaked at 1430, when SPX was at 1352. Since then the divergence has been growing larger with a new low last Friday at 540. This huge worsening of the breadth indicator should exercise downside pressure over equities sooner rather then later.
We cannot forget to monitor VIX.
If the scenario of a multi-week correction plays out then VIX is expected to benefit from a potential environment led to protect equity profits.
In the monthly chart below I have delimited various resistance layers.
It is reasonable to consider the 14.67 area as a potential bottom while above I would not rule out an attempt to reach the range 22 - 23.86.
Such a move of the VIX would "guarantee" that SPX should drop at least towards the 1340 area.
In the mean time VIX is already establishing a sequence of higher highs/lows off the March 16 low at 13.66 and it has breached a long term Trend Line Resistance.
If it were able to build a base above the 16.40 area then I would not rule out a move towards the March 6 high at 21.24.
The BB are tightening which usually is a prelude of a large move.
Investor Sentiment is worsening. Maybe it will follow the script of extremes readings = Market Top & Market Bottom.
Next Tuesday AA kicks of the first quarter earning season, GOOG on Thursday and JPM And WFC on Friday will be the weekly major reports.
