Yesterday I mentioned that: " Elliot Wave wise the absence of an impulsive decline or an Ending Diagonal suggests that price has not established yet a tradable bottom. Maybe what is needed is a final "flush out" which would allow a selling exhaustion and capitulation."
My suspicion was confirmed by the price action.
Yesterday it was a different down day, for the first time since the down leg off the May 1 is in force we saw indications of fear although I am not sure that we have seen the final "flush out" that usually occurs at market bottoms.
btw I wanted to make an aside : when I refer to a market bottom I don't mean that price has completed an EWP, for the time being only a low that could open the door to a multiday rebound.
We can detect fear by looking at the VIX chart, since it finally confirmed the Inverted Head & Shoulder which has a theoretical target at 28.50.
Regarding if yesterday was the final capitulation I have serious doubts since:
- In my opinion the EWP from SPX last lower high on May 11 is not completed yet. Remember that we need a 5 -wave decline and so far in my opinion price is still embarked in the wave (3)
- We did not get a 90% down day, a surge in selling volume that usually occurs when price is on the verge of establishing a bottom. In the chart below you can see the larger selling pressure occurred on the October 4 bottom.
Yesterday I also mentioned that: "the equity market momentum and breadth indicators were getting oversold, well today they are even more oversold and several indicators are piling up flashing warnings of "enough oversold?"
There is not a single doubt that the market now is in extremely oversold territory. It does not matter which indicator you look at, across the board the message is the same.
For example the McClellan Oscillator closed yesterday at -100.89.
So we have:
- Supports have been breached but price has not reached obvious target zone yet.
- High bearish sentiment.
- Fear is creeping in.
- Extreme oversold readings of market momentum and breadth indicators.
Obviously for the short-term time frame the odds that price is getting closer to some type of a bottom are increasing, but we cannot rule out either that price could accelerate lower, keep in mind that the human emotions can cause a waterfall force over price when there is panic.
Lets go to the charts.
SPX is approaching the target box where we have a cluster of support.
The range is 1300 - 1277.
It is a trivial statement that somewhere in between price will establish some type of a bottom. But from the weekly chart below we know that regardless the degree of the potential bottom achieved, 1343 is now the critical resistance that price will have to win back in order to attempt a price reversal.
I maintain the idea that the current EWP from the April 5 top is corrective and should establish the bottom of a wave (B). But it will probably consume more time, barring QE announcements from FED or BCE.
So far the weekly candlestick is a Black Marubozu, If Friday ends on a weak note then it could be considered an exhaustion candlestick. Usually a Marubozu is followed by a small range body. We shall see what fate will price have in mind next week.
Regarding the EWP from the April 2 top I am considering two scenarios:
- Price is unfolding a Double Zig Zag (Black Count)
If this is the correct count then price is now involved in establishing the bottom of the wave (A), which is in force since the May (1) lower high.
In other words we need a 3-wave down leg off the May 1 peak, something that can be considered almost fulfilled.
The wave (A) will be followed by a multi-day/week wave (B) rebound before the kick off of the wave (C) down.
- Price is unfolding a Zig Zag (Blue Count)
If this is the correct pattern then price is now involved in establishing the bottom of the wave (3) of (C).
If this is the case then we know that we need a fiver from the May 1 peak before we can consider that a more important bottom can be considered in place.
Hence when the wave (3) is in place I would expect only a multi-day rebound, which probably will stall at the 1340 horizontal support, from where price would launch the final wave (5).
The overlap with the wave (1) is at 1347.03.
For the immediate time frame since in my opinion the move from the May 1 peak is not completed yet, if price breaches the 1300 support then we have 2 major areas as potential candidates for a low:
- The October 27 hod = 1292.66
- The 200 d MA = 1278
Additionally the 0.382 Fibonacci retracements = 1289 could come into play.
There are so many tissues that should be analyzed today but I don't have time. I will leave it for the weekend update.
To sum up:
We have an oversold market with fear creeping in and bearish sentiment, but the short term EWP in my opinion is not done yet, therefore the risk for more declines is still large.
That said price is on the way of establishing some type of a bottom.
Today we have the monthly OPEX and the Facebook IPO, I guess that the majority is hoping for a "rally" taking into account that it is 100 billion $ new issue. So SPX eod print will be crucial.
This Friday does not look like a typical one I expect a lot of volatility.
Have a safe one.
And enjoy the weekend.
