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Weekly Technical Analysis

This weekend I don't have much new to say since price is following the scenario that I have laid out.

Last Friday's brief description remains my preferred road map:

  • "Price is involved in unfolding a corrective pattern from the September 14 high.
  • If price breaks the 1430 - 1422 key support layer then the current corrective EWP should at least extend towards the target = 1397 - 1395. I consider it a likely outcome.
  • Once price reaches the mentioned target and we have positive divergences then price should attempt to resume the intermediate up trend.
  • If price fails to establish a bottom then the next likely potential reversal zone is located in the range of the rising trend line support in force since the October 2011 lows and the 0.5 retracement of June's up leg where we also have the 200 d MA = 1370.

Since yesterday price negated an impulsive sequence from the October 5 lower high, the overall EWP is getting more complex and probably the final target will be closer to 1396 than 1370."

Lets begin with the weekly chart, where we can see new bearish signals:

  • Lower low/high sequence ==> the trend is down.
  • Weekly close below the 10 d MA for the first time since mid June.
  • Even though in the weekly time frame the trend line support off the June lows does not appear to be broken, in the daily time frame, last Friday's eod print was below it.

The key pivot support is at 1422. Once/if it is breached price is expected to drop quickly to the first potential target located in the range 1396 - 1392.

If the range 1396-1392 does not hold then the next and most likely bottoming zone is located in the range of the trend line support in force since the October 2011 lows and the 0.5 retracement of the June's up leg = 1371.

SPX Weekly Chart
Larger Image

Regardless of likely oversold bounces I maintain a bearish bias as long as:

  • Price does not have a potential completed EWP from the September 14 high.
  • I can detect a reversal pattern at a potential pivot zone in conjunction with positive divergences and hopefully with extreme bearish sentiment.

Regarding sentiment, the last AAII bull ratio is moving in the right direction but it still has to drop further before reaching extreme readings.

AAII Bull Ratio Chart

Before moving on to analyze the shorter time frame I want to show the "picture" of the weekly momentum indicators:

  • RSI has clearly breached the June's trend line + we have a H&S with a target at 54.50, although the obvious support is at the 50 line in conjunction with the rising trend line support off the August 2011 low.
  • The Stochastic has a sell signal in force since September 21. In order to expect further extension to the down side it has to breach the 80 line.
  • During the curse of the corrective pattern in progress we have to watch the MACD signal line.

SPX MACD Weekly Chart
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In the next SPX daily chart we have the detailed "map" where we can see:

  • Friday's eod print below the June's trend line.
  • On Friday price barely managed to close above the 50 d MA.
  • Reiterate the 3 crystal ball pivot levels:
    1. 1422.
    2. 1396.
    3. Range of the trend line off the October 2011, 0.5 retracement & 200 d MA.

SPX Daily Chart
Larger Image

As I mentioned last Friday since the down leg off the October 5 lower high is not impulsive I have modified the overall count to a Double Zig Zag. Therefore if this count is correct price should be approaching the bottom of the wave (A) of the second Zig Zag.

Once the wave (A) is in place I expect a multi-day rebound wave (B) that should fade at the range 1445 - 1449 from where the "last" wave (C) down should complete the EWP.

SPX Daily Chart
Larger Image

Friday's Doji is strengthening the scenario of an oversold bounce, but since we are dealing with a corrective down leg we have to be aware that the pattern can easily morph, in addition the weak bounce off Friday's lod may have shaped a bearish flag hence I would not rule out at least one more down leg before the assumed wave (A) could be in place.

But before analyzing the internal structure of the current down leg I have 2 reasons that are supporting a short-term bounce:

  • Daily stochastic is now extremely oversold.

SPX MACD Chart
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  • Positive divergence of the McClellan Oscillator since it has not established a lower low below the October 10 reading while SPX has a lower low.

NYSE McClellan Oscillator Chart

Lets now move on to analyze the internal structure of the down leg off the October 5 lower high = Assumed wave (A).

As I have mentioned above we are dealing with a corrective down leg, therefore we have to be aware that it can easily morph and extend lower, and there are several valid ways to label it.

My preferred count is a Zig Zag. This EWP can be considered complete with one more down leg provided price does not overlap above 1431.89 before a new low is established.

The wave (C) of the ZZ has an extension target in the range 1419-1409.

1422 could be a nice reversal spot.

SPX 15-Minute Chart
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In addition NDX could be on the verge of finishing an Ending Diagonal, hence the oversold bounce should be "around the corner."

NDX 15-Minute Chart
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Regarding the breadth indicators I want to highlight two issues:

  • The weekly stochastic of the Summation index is following the script of my preferred EWP since it has issued a sell signal but it still has further room to the down side before entering the oversold zone where a potential price reversal should occur.

NYSE Summation Index Chart

  • The 10 d MA of the NYSE Adv-Dec Volume has not been affected despite SPX has lost 42 points during the down leg off the October 5 peak. This clearly shows that investors are not worried regarding a potential larger correction, but this level of complacency can provide an intense wave (C) down if they surrender.

NYSE Advance/Decline Volume Chart

The same conclusion can be deduces form the Rydex Total Bull/Bear Assets. Here we can see that bull assets have decreased but there is no interest in betting against the market.

Rydex Bull/Bear Total Assets Chart

Lastly VIX.

Friday's Hammer is suggesting a bearish Monday the equity inidces.

I have already discussed the potential bullish set up (Double Bottom) so we have to see how it evolves on a daily basis, and if it agrees with a possible "oversold bounce" of the equity indices.

VIX daily Chart
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Next Tuesday I will not post the daily follow up.

 

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