Continued selling pressure has carried SPX to an important support located in the area of 1293. The impressive downside momentum in addition to extremely oversold breadth indicators are suggesting that the corrective EWP from the April 2 top is by no means reaching an end. I am inclined to expect more downside pressure ahead and/or a larger EWP before price completes its course of action and the intermediate up trend can resume with a potential fourth quarter rally.
Europe probably is now in a final critical phase and point of no return, as it needs now to clean up the Spanish financial sector and assess the incremental damage of a minor Euro-zone disintegration if Greece leaves the Euro. The Greek problem and uncertainties will weight negatively at least until the coming June 17 elections.
In the US the "Operation Twist" is scheduled to terminate by the end of June.
There will be a lot of attention placed on the next FOMC meeting on June 20. It is a fact that most likely the FED will have to come to the rescue once again, but probably, in order to justify more QE the equity market will have to drop further.
Lets go to the charts.
My intermediate term scenario remains unchanged. I still consider not completed the wave (X) that began at the November 2008 lows.
My preferred count calls for a Double Zig Zag in progress. Within this EWP, price on April 2 has completed the wave (A) of the second Zig Zag. Hence now we are in a wave (B) pull back that will be followed by the last wave (C) up, that should take place during the fourth quarter.
Regarding the EWP of the current wave (B) move it is not clear at this stage if it will be a steep decline like the previous two corrections occurred on May 2011 and April 2010 or it will unfold a more time consuming flat or a triangle.
In the monthly chart below we can see that price has now reached an important horizontal support at 1293. If this area is breached then the next key down side levels are 1258 then the 100 MA = 1222.
Further more we can establish the Trend Line Support in force since the March 09 lows as the last "defense" zone that should not be breached under the current scenario.
With 9 trading days left to end the month of May it will be interesting to see if the:
- Monthly RSI remains above the trend line support or it does not breach the 50 line.
- Monthly Stochastic confirms a bearish cross
- Monthly MACD triggers a sell signal
On Friday price has reached the important key level at October highs = 1292.66. The impressive selling pressure has left in the weekly chart almost a black Marubozu. This candlestick does not suggest that price has reached yet the potential spot that would allow some type of relief bounce.
The immediate key down side levels are located at the:
- 0.382 retracement of the October 4 - April 2 rally = 1289.42
- Weekly gap = 1289.09
- Horizontal support at 1285
- 50 w MA = 1282 and the lower Bollinger Band.
Therefore in my opinion odds are very large that in this range SPX should establish a "pause" of the "impressive" down leg from the May 1 lower high.
The 1343 area is now the key resistance area that price will need to recover in order to attempt a reversal of the trend that now is unquestionably pointing to the down side.
Weekly momentum indicators are displaying the impressive and unusual down side pressure. If this trend it is not reversed soon it could have undesirable consequences on the overall EWP, At the same time it is suggesting that if "the wave (B) scenario" is not aborted it will require more time to be completed than initially thought.
Last week I have already discussed that market breadth is extremely oversold. But it seems that this time being oversold is not synonym of a potential major market bottom. In other words there is no way to know the degree of oversold level that will coexist with the end of the correction.
I believe that the end of this correction will be possible once we see positive divergences, like it occurred with the October 4 bottom.
For example you can clearly see the positive divergences that took place in the Summation Index and the NYSE % of stocks above the 50dMA at the October 4 SPX bottom.
- Summation Index:
- NYSE % of stocks above the 50d MA:
In the following daily chart we can see that price is approaching a potential trend line support. If it is breached then the 200 dMA at 1278 will come into play. Below the 200d MA I have highlighted 4 key support areas:
In the next chart I zoom in the area of the EWP that is now retraced, here I have added support areas that may be tested during the course of this correction.
Obviously, if price loses the 200 dMA it will be a serious concern but we would still remain within the standard Fibonacci retracement of a wave (B) pullback.
For the short-term I expect that in the range 1289 - 1278 price should establish a potential bottom. The degree of the low will depend upon the correct EWP that price is unfolding from the April 2 top.
Last Friday I suggested 2 potential scenarios:
"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 1347.75"
