Yesterday price finally took the unavoidable route that momentum and breadth indicators were suggesting. Sell stops were triggered once market participants realized that 1450 was no longer a reliable support.
Now it is possible that price has initiated a multi week corrective sequence that should undertake a Fibonacci retracement of the corrective up leg off the June 4 lows.
We know 2 issues that must not be forgotten:
1. The summer rally has unfolded a corrective EWP hence the July 14 high is not a major top.
2. In addition the internal structure of the current pull back from the July high is also corrective.
Therefore price should be now involved in the initial stage of pull back that should grow in size but it should not endanger the intermediate up trend.
Lets go to the charts:
The first one is a 15 min chart, which shows a potential EW count = Double Zig Zag. This labeling is suggesting that price is unfolding the wave (C) of the second ZZ.
We have an extension target in the range 1440 - 1427, probably, the 20 d MA which yesterday was at 1436 could be tested today, also it may be to outrageous for the bears to break down below 1435 (FOMC QE3 announcement).
Once the DZZ is over I expect a multi-day rebound that will fail by establishing a lower high followed by more down side action.
In addition the short-term count that is suggesting that price should be approaching a short term bottom we already have already extreme readings in TRIN = 3.06 and TICK = -832.
But again, if price has begun a multi week pullback we should expect more down side ahead until the daily stochastic enters the oversold zone.
Yesterday the MACD has issued a new sell signal while the RSI has already breached the trend line support in force since the June low. The next area to watch is the 50 line. The Stochastic has a lot of room to the downside before entering the oversold zone.
The McClellan oscillator has its stochastic in the oversold zone but it is still above the oversold - 60 line.
In the next daily chart I zoom in the time frame that is now in focus.
We can see that:
- Yesterday bears achieved a forceful break down.
- Price is approaching a strong support zone in the range 1438-1436.
- I don't expect for now an eod print below the Trend Line (from July 24).
- The support layer 1429 - 1422 will probably be tested by a second leg down.
- So far I maintain the range between the trend line from the June lows and 1396 as the low point target of the correction.
In the next daily chart we info regarding the time frame of the summer rally with the major price levels, MA, trend lines and Fibonacci retracements.
For the time being I maintain a big question mark both for the June low and the July high. I am referring to the correct location within the counter trend rally (wave X) from the March 2009 lows.
But I am confident that in the worst-case scenario price will not lose the trend line in force since the October 2011 low; therefore I consider that the most probable scenario is that price will unfold another large up leg once this correction is over.
And lastly we have to monitor VIX, which should ratify the multi week equity, pull back by a move towards the upper Bollinger Band - 200 d MA, but I doubt that trend line from the April 2011 top will be breached.
Conclusion:
- Price should unfold a larger corrective pattern.
- Potential target at the 0.382 retracement of June's up leg.
- We have to monitor momentum, breadth indicators and VIX in order to ride the bearish wave.
