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Daily Analysis

Today is FOMC day.

This week's price action is clearly suggesting that Mr. Market is betting on good news.

As you know my long term working scenario has been/still is that price from the November 2008 low is unfolding a counter trend wave (X).

The wave (X) is tracing a Double ZZ:

  • Hence on April 2 price has completed the wave (A) of the second Zig Zag.
  • Therefore price is now involved in unfolding the pullback wave (B) that should hold above the trend line support in force since the March 09 low.
  • The internal structure of the wave (B) has to be corrective and should unfold one of the following EWP: ZZ, DZZ, TZZ, Flat or a Triangle.

So far I have been looking for a potential ZZ = (ABC). If this is the correct count then price should be close to complete the wave (B), and a wave (C) down is expected to establish with a lower low an important bottom.

SPX
Larger Image

I had assigned to the counter trend wave (B) rebound, which began at the June 4 low, a reasonable target in the range 1344 - 1363.

We also knew that the 50 d MA = 1347 and a gap at 1353.39 could have played as a topping "sweet spot".

This has not been the case and the 0,618 retracement at 1362,84 and a potential horizontal resistance at 1365.88 have been left as the last line in the sand that can maintain alive the option that price will unfold a Zig Zag from the April 2 top.

On the other hand if price, maybe after a short lived pullback, is able to break above 1366 then a potential Triangle or Flat would increase the odds of being the correct EWP.

In this case price will still be unfolding a wave (B) but price, on June 4, would have already established the low point of the EWP.

SPX
Larger Image

It may sound complex but it is not.

Going forward the correct scenario will be dependent upon how price behaves in the next pullback, which should be triggered soon, since as I mentioned yesterday we have several momentum and breadth indicators in overbought territory.

If we look at the McClellan Oscillator, yesterday it closed at an overbought 82.74 reading, but again without negative divergence, therefore as long as the trend line support is not breached I cannot adopt a bearish stance.

NYSE McClellan Oscillator

Longer term market breadth indicators such as the weekly stochastic of the Summation index have issued a buy signal which usually can remain in force until the weekly stochastic enters the overbought zone.

NYSE Summation Index

Since I always "weight" in the technical cocktail not only EW counts but also the message given by momentum & breadth indicators I suggest that we have to be prudent to entrust an immediate reversal of price.

Therefore for the time being I will wait for the reaction to today's FOMC announcement which hopefully should give us clues regarding the short term most likely outcome.

So even though price has satisfied a potential reversal for the assumed wave (B), within the option of a Zig Zag (there is a pending large wave (C) down), both in terms of time and retracement, the short-term price structure does not give enough confidence that the countertrend rebound is over, while the overbought readings reached are suggesting that at least a pullback is due.

The structure of the expected pullback corrective / impulsive will dictate over the correct EWP.

 

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