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Weekly Analysis

If you are a regular reader of my technical analysis you must know by heart my preferred long-term count for SPX.

As you already know, I am considering that from the November 2008 lows price is unfolding a wave (X).

The wave (X), which by definition is a counter trend move, belongs to a large Double Zig Zag (from the 2000 Top).

If this count is correct price, on November 2008, has completed the first Zig Zag, therefore once the wave (X) is in place, the EWP should open the door to a major reversal, with the second Zig Zag down.

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The wave (X) so far has traced a 5-wave pattern (not impulsive), hence it cannot be considered finished. Keep in mind that a corrective counter trend move has to unfold one of the following:

  • 3 -wave up leg (ZZ)
  • 7 -wave up leg (Double ZZ)
  • 11 -wave up leg (Triple ZZ)

Therefore I am looking for price to trace a Double ZZ.

Hence, following this reasoning, on April price should have established the top of the wave (A), now price is involved in a corrective wave (B) pullback. Once the wave (B) is in place, price will unfold a large wave (C) up that could match the 348 points achieved by the wave (A), therefore we could even see price move above the 2007 top before reversing to the down side.

In the weekly chart below I have the detailed count:

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It is very important to leave aside all the "noise" and the media deliberate spreading of information which most of the time is sensationalist, don't listen to much to equity analysts because most of the time they are behind the curve, neither pay attention to "perma" bears/bulls EW Analysts because they only follow their own bias.

What I suggest is to be open-minded and draw your own plan based only on the information that you perceive from price, technical and sentiment indicators.

  • What is price telling us?

If we analyze the DOW's EWP form the March top the only reasonable conclusion is that price is unfolding a corrective pattern.

So far we have a complex 3-wave down leg that has not even established a lower low. Therefore we can already rule out that price is involved in a major trend reversal.

We could even consider that price has completed the correction if we did not take into account what momentum and breadth indicators are suggesting and we did not care that the EUR has not completed yet its own corrective pattern.

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In addition as I mentioned on Tuesday: "risk correlated markets (currencies and commodities) are also getting hit, which is suggesting that investors are looking for "safety".

Safety means that money is moving out of risk assets into an overbought bond market and into the USD.

Therefore a reversal of the Bond market and the USD are the requirements needed in order to consider that the equity market is approaching a bottom.

Regarding the US 30 yr. Bond I honestly don't see yet a reversal pattern in sight.

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  • What is market momentum telling us?

In the weekly time frame, the MACD with a confirmed bearish cross has joined the bearish signal issued by the Stochastic on March 30 and the RSI loss of the trend Line support on April 27.

Therefore we can deduce that price has completed the up leg off the October 4 low but there is no indication that the correction is over.

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  • What is market breadth telling us?

The Summation Index buy signal issued on April 26 has failed. We now have a new sell signal issued on May 7 and a new lower low.

In the longer time frame chart we can highlight a positive divergence of the RSI.

The 10 -day MA of Adv-Dec Volume also has a positive divergence and it is approaching the oversold line.

  • What is sentiment telling us?

The AAII bull ratio is approaching extreme "despair" readings.

Last week's survey puts bullish sentiment at the lowest level since September. This is considered a contrarian indicator.

The 10 d CPCE, since the beginning of May, has spiked up and it has already reached readings that, during last year, occurred near SPX bottoms.

  • What is missing is fear.

VIX has not spiked higher, probably, because the Dow is still above the April 10 low.

If, as I expect, price will resume shortly the downtrend with the wave (3) of (C) then we should see VIX moving higher.

We already have the weekly MACD with a bullish cross.

The immediate resistance is at 21.88 then we have the 50 w MA at 24.35 and the 200 w MA at 27.31.

In addition there is a potential inverted H&S that has a theoretical target at 28.50.

The weekly doji is suggesting "indecision" and agrees with a potential larger bounce of SPX early next week.

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To sum up, based upon the above analysis "things" are not as bad as one might think. The equity market will most likely remain under pressure but we are beginning to see the initial alignment of the technical indicators that may allow an important bottom once price has completed the corrective EWP.

Lets now analyze with more detail the price action with the assumption that price on April 2 has completed the wave (A) of (Y) of (X).

As I have mentioned above the current pullback fits with the scenario of being the wave (B) of (Y) of (X).

The needed requirement for this scenario is the loss of SPX 1340 & DOW 12710. If both requisites are fulfilled then I am expecting a rapid drop towards the range 1300 - 1285.

If 1285 does not hold then the 200 d MA, which today sands at 1277 should act as a formidable support.

As a marginal note in this area price is expected to establish an important low, although we cannot rule out that price may need more time to establish the final bottom of the wave (B) if, during the summer, the EWP morphs into a Triangle or a Flat. The ongoing saga in the Eurozone and the next FOMC meeting on June 20 should determine when price is set to resume the uptrend.

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Short-term price action:

I maintain the scenario that I mentioned on Friday:

"For the time being I am assuming that price is now involved in tracing either the wave (C) of a larger Zig Zag, which would imply the resumption of more down side shortly with an impulsive wave (3) (once a relief bounce is completed), or a more complex Double ZZ, which implies a larger rebound with a wave (X)".

Given the lack of strength seen last week may preferred count calls for an impulsive wave (C) off the May 1 peak, therefore I expect any follow trough to the upside to be short lived with a target in the range 1370-1378 from where I expect the kick off of the another 5-wave decline = wave (3) of (C).

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Maybe the overlapping and choppy recovery attempt has unfolded a Triangle wave (B). If this pattern is correct next Monday we should see an impulsive wave (c) up that should complete the relief bounce:

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