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Weekly Technical Analysis

Friday ended up being a nasty day for the bulls resulting in a bearish Engulfing candlestick.

As you can see in the SPY daily chart below price opened above Thursday's hod, filled the gap at 145.09 but sellers stepped in at the 50 d ma and price closed almost below Thursday's lod.

This price action can be considered as a technical failure and at the same time it can have satisfied the target for the "assumed" wave (B) oversold bounce.

If this is the case and the wave (C) down is already in progress then the equality extension target is at 137.59 (slightly below the 200 d ma).

SPX Daily Chart
Larger Image

On the face of it we could conclude that the next directional move is going to be to the down side.

On Thursday I made a basic checklist of items needed in order to identify the end of the corrective bounce:

  • A completed EWP: YES

We can count the bounce as a Triple Zig Zag.

In addition if next Monday price completes an impulsive sequence then the following bounce is a SELL.

It is an irrefutable fact that the bounce off the October 26 low is corrective hence even if price has not established yet the top of the wave (B) this move will eventually fail.

This pattern will most likely be resolved early next week.

SPX 5-Minute Chart
Larger Image

  • Negative divergence of short-term breadth/momentum indicators: NO

McClellan Oscillator:

NYSE McClellen Oscillator Chart

Without another push higher of price we don't have negative divergence.

If a top is in place the Oscillator has to breach the short-term trend line support and establish a lower low.

Momentum Indicators:

The RSI remains above a short-term trend line support (off the October 24 low)

The Stochastic remains with the buy signal issued on October 31.

SPX Momentum Chart
Larger Image

  • An exhaustion move, which should be detected by a bearish candlestick: YES

We have a bearish Engulfing Candlestick.

  • Low TRIN, high Tick, low CPCE etc.: NO


Conclusion:

The "picture" is favorable for the bears BUT they need to finish off the task next Monday by achieving an impulsive decline since so far Momentum & Breadth indicators are not aligned for the kick off of the "assumed" wave (C) down.

A complete impulsive sequence would allow a bounce into Election Day and a post Election resumption of the wave (C) down.

SPX weekly candlestick, an Inverted Hammer, can be considered as an antagonist to the daily Engulfing. It is synonymous of hesitation establishing a tight fluctuation range clearly defined by the 10 w ma = 1436 and the 20 w ma = 1407

The Weekly Inverted Hammer is suggesting that price could attempt a bounce at least at the beginning of next week; maybe we have to wait for the post-presidential election decline idea.

In the weekly time frame in addition to the well-known 1395 & trend line support off the October 2011 lows, inside the target box we have a horizontal support at 1375 and the rising 50 w ma, which at the moment stands at 1359.

SPX Weekly Chart
Larger Image

My scenario remains the same:

Price form the September 14 high is unfolding a Double Zig Zag, which needs the last wave (C) down.

As I mentioned last Thursday:

"The assumed final down leg could bottom either at:

1. The 0.382 retracement which coincides +/- with the rising trend line off the October 2011 lows = 1395
2. In the range or the 200 d ma = 1378 - 0.618 retracement = 1346

At the moment I have a preference for the second target zone, with a likely candidate in the range of the 200 d ma and the 0.5 retracement = 1370."

If last Friday SPX has established the top of the wave (B), the 1 x 1 extension target for the pending wave (C) down is at 1373.

SPX Daily Chart
Larger Image

In the technical front:

  • There is a substantial deterioration of weekly momentum indicators with the sell signal triggered by the MACD at the end of October; hence the expected bottoming process should require more time.

We have to watch if price will have unfolded a reversal pattern once the RSI approaches the 50 line and the trend line support in force since the August 2011 lows.

SPX Weekly Momentum Chart
Larger Image

  • The RSI of the Summation Index has entered the oversold zone. It usually remains in the oversold zone some time in order to allow price to form a reversal pattern. We will need to see at least a positive divergence of the RSI in order to consider feasible a bottom.

NYSE Summation Index

  • The Weekly Stochastic of the Summation Index has reached an extreme oversold reading; hence it is questioning a pending large decline of SPX. A bullish cross of the signal line would be a serious warning that price has established the bottom of the corrective pattern off the September 14 high.

NYSE Summation Index Weekly

  • The NYSE 10 d Adv - Dec has room to the down side before reaching the lower historical range that usually coincides with important bottoms.

NYSE Advance/Decline Volume Chart

Lastly VIX with an impressive Piercing Line should have established a bottom at the lower trend line of a potential large Bearish Flag.

The RSI is has not breached its trend line support.

Therefore It is reasonable to expect that in the next few weeks VIX will challenge the October 23 high, at the same time that SPX is unfolding its wave (C) down.

VIX Daily Chart
Larger Image

 

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