On Friday the critical support at 1292 withstood the Bear's raid. Yesterday bulls brightened up and achieved a "solid" upside move.
If we don't forget that last week, momentum and breadth indicators had reached extremely oversold readings, yesterday strong move to the upside should be considered a relief bounce that will palliate those extreme readings.
But we cannot rule out that the current bounce may be more than a one-day affair and could have the intention to check the solidity of the resistances.
Therefore if a critical support has not been breached and the market is hugely oversold then the "pendulum" could now lean towards the bull's side and price could now attempt a move up to test the critical initial resistance in the area of 1340.
As a reminder, my preferred scenario assumes that from the April 2 top price is unfolding a corrective pattern that will establish the wave (B) of the second Zig Zag in force since the November 2008 lows.
This EWP can be complex and time consuming. Once the wave (B) is in place I expect a large rally with a wave (C) up, most likely during the fourth quarter.
Therefore I am certainly not considering the correction over but we could witness a multi-day rebound.
In my last weekend technical update I suggested that price, from the April 2 top, could be tracing two potential EWP. The difference between the two options lies in internal structure (impulsive or corrective) of the down leg from the May 1 lower high.
So far I cannot count it as impulsive, then barring that today price rolls over to the down side I am inclined to assign a larger probability to the Double Zig Zag option, in which case on Friday price would have established the wave (A) of the second Zig Zag.
If this is the correct count then price is now involved in the infancy stages of a wave (B) rebound that could have as a target the range 1340 - 1353.
Then once the wave (B) is completed price will resume the downtrend with a wave (C) down with a potential target in the range 1278 - 1220.
It is all a matter of time and price. If bulls approve the test of achieving to maintain the trend up/sideways for more than 2-3 days than I will rule out that the down leg from the May 1 has more business to the downside, instead my preferred short-term scenario will be looking for multi-day wave (B) rebound.
Clearly at this stage I can only speak of odds, not of a confident count. So I will monitor the internal structure of the bounce and how market breadth and momentum behaves.
Regarding momentum Indicators, we already have a bullish cross of the daily Stochastic (from extreme oversold reading), but what I will be monitoring is the RSI since during the course of the current rebound it should not recover above the 50 line.
Regarding the breadth indicators, of course the McClellan Oscillator will stay on my radar screen. You already know the Zero Line and the 5 - 10 d MA crosses are the markers that distinguishes bullish / bearish moves.
btw yesterday strong raise has to be respected.
In addition we have to monitor VIX, EUR and the Bond markets as they will strengthen or kill the idea of a "large" wave (B) rebound.
So today I just suggest a possible short-term outcome.
We shall see if the market confirms it.
