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Weekly Technical Analysis

I will begin the weekend technical analysis examining again the long term EWP.

  • Regarding the very long-term count, in my opinion it remains reasonable to consider that price form the March 2000 Top is unfolding a Double Zig Zag, therefore from the November 2008 low or the March 2009 low price is involved in carrying out the wave (X).

It is unquestionable that the internal structure of this large up leg is corrective hence I rule out that price will substantially break above the October 2007 Top.

If this is a wave (X) then, once it is completed the pattern suggests that price will reverse strongly to the down side, with the wave (A) of the second Zig Zag, towards the March 2009 lows.

SPX Monthly Chart
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  • Regarding the EWP form the November 2008 low, on October 28 I suggested two potential options:

1. Price with an Ending Diagonal will complete the last wave (Y) of (X).

If this is the correct pattern then the current up leg (assumed wave (III) of the ED has to be shorter then 207.77 points

This ending pattern could be done by the end of the first quarter of 2013.

SPX Monthly Ending Diagonal Chart
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2. From the October 2011 low price, with another DZZ, is unfolding the wave (A) of the second Zig Zag of (X).

If this is the correct pattern, since the up leg off the November 16 low is once again corrective, price should unfold a flat before the kick off of the final wave up of (A). This means that the current move will fail at the September high and will revisit the November low from where it will begin the wave (c) of (A).

If a Flat correction plays out then the wave (A) could top in the area of 1551. The wave (A) will be followed by a wave (B) large pullback maybe at the rising trend line in force since the March 09 low form where the last wave (Y) up will complete the wave (X).

If this is the correct pattern then, obviously the final top of the wave (X) will most likely be prolonged into 2014.

SPX Monthly Double Zig Zag Chart
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Today I add a third option, which is an alternative within the latter EW count, in case price does not unfold a flat, instead it breaks above the September's high establishing the top of the wave (A) with an Ending Diagonal.

If this is the correct count then the current (assumed) wave (v) of the Ending Diagonal cannot exceed above 1551.12.

SPX Monthly Ending Diagonal Chart
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I strongly believe that one of these three options should be the "good" one.

The EW issue is that the majority of the "journey" from the March 2009 low has been accomplished with corrective EWP, especially from the October 2011 low. This characteristic has disconcerted the majority of EW investors since at each "swing" bottom the corrective nature of the up legs were not suggesting the resumption of the intermediate up trend.

Three requirements are needed in order to consider feasible a multi-week/month bottom:

  • Fear: VIX has to spike.
  • Sentiment: Retail Investors are bearish (Extreme low readings of AAII bull ratio).
  • Oversold breadth and momentum with positive divergence.

This time, at the November 16 low, we did not have a spike of VIX or positive divergences of momentum and/or breadth indicators; instead this bottom was established with extreme oversold readings of breadth/momentum indicators and extreme bearish sentiment.

Two characteristics were missing: Positive divergence and fear.

So once again EW analysts/investors are scratching their heads (me too) wondering if the move off the November 16 low is just a harmless "bounce" or bulls are once again fooling everyone with another deliberately misleading move.

Therefore I will try to remain uninfluenced by emotions or personal prejudices and attempt to look at the "facts" with objectivity.

Hence I cannot rule out that the November 16 low is another "swing" bottom.

Bulls have several positives:

  • Extreme low reading of AAII Bull Ratio.

Usually the AAII Bull Ratio should now move towards extreme bullish readings in order to expect a major top.

AAII Bull Ratio Chart

  • Substantial improvement of weekly momentum indicators with the RSI breaking above the trend line resistance from the September high and recovering by the end of November the 50 line and reclaiming the trend line support in force since the August 2011 low, while the Stochastic has issue a new bullish cross.

SPX Weekly Momentum Chart
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  • A breadth thrust that usually open the door to a substantial move to the upside.

The weekly stochastic of the Summation Index has issued a buy signal that usually open the door for a multi-week/month move to the upside.

NYSE Weekly Summation Index Chart

  • Improvement of risk on / risk off indicators.

The indicator made of the ratio SPX vs TLT (20+ year Bond etf) has substantially improved and it could be aiming at the upper Bollinger Band.

SPX versus TLT Chart

Going forward if the equity market has established a major bottom at the November 16 low then we should expect investors to move out of defensive sectors (lower-beta) into risk on sectors (high beta ones). So far this is not the case as we can see in the chart below of the ratio made of high beta /low beta (Power Shares etf) since mid October it remains in a sideways trading range.

High Beta versus Low Beta Chart

  • The November 16 low has been a textbook reversal at the 0.618 retracement of the June - September up leg.

  • SPX on November 19 has recovered above the 200 dma and last Wednesday it has confirmed with a successful retest that now the 200 dma = 1387 is the pivot support.

  • Bullish seasonality. December-January-February are usually bullish friendly.

Lets move one.

November has ended with a monthly doji (with a long tail) suggesting that there is a serious attempt to establish a bottom at the November 16 low if this is the case next month SPX should remain above the 6ma=1403.

SPX Monthly Chart
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However the weekly candlestick, a Hanging Man, despite the recovery above the trend line of October 2011 low, is suggesting that odds are favouring a pullback next week.

The former support at 1422.38 (April 2 peak) is now the critical resistance that bulls have to reclaim in order to attempt a move back towards the September high.

SPX Weekly Chart
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Lets now move to the shorter-term time frame.

As I have discussed last Thursday in my opinion price from the November 16 low is unfolding a Double Zig Zag.

If this count is correct then SPX on November 23 has completed the first Zig Zag, while within the second one, which began at the November 28 low, SPX has completed the wave (A) last Thursday.

During the last two days price has been trapped in a sideways move, which is hiding the next directional move.

Since there is absence of impulsive price action we could make the case that price has completed a Triangle wave (B) at 1411.77 in which case next Monday we should expect impulsive follow through to the upside with a wave (C) up.

The assumed wave (C) up has an equality extension target at 1446;

Almost the 1 x 1 target for the wave (Y); while the 0.618 extension is at 1433 (It coincides with the November 6 peak).

If the Triangle pattern plays out then this up leg could extend into the next FOMC on December 12 (or NFP on next Friday).

If next Monday the Triangle is aborted then I expect a shallow pullback wave (B) that should not breach the 0.618 retracement at 1398.53, which coincides with the 10 dma, from where I expect the wave (C) to begin its impulse higher.

Once the wave (C) is in place the following pullback will define if bulls have failed establishing a lower high (Option of a Flat) in which case price will revisit the November 16 low, or one of the two Ending Diagonal options discussed above is panning out, in which case the 200 dma = 1384 will not be breached in any pullback.

SPX 15-Minute Chart
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The triangle idea looks even better with NDX:

NDX 5-Minute Chart
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In the daily SPX chart below I highlight the potential pivotal price areas.

  • 50 dma = 1421 (which coincides with the April 2 peak): I expect this area to be reclaimed by the bulls since the assumed wave (Y) would be too small compared to the wave (W).
  • November 6 peak =1433, this is a potential reversal area as it also coincides with the upper Bollinger Band.
  • 1451 = 1 x 1 extension for the assumed wave (Y).

SPX Daily Chart
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Even though the short term pattern still favour the bulls the equity market is now entering overbought territory as we can see from the daily stochastic, but a negative divergence of the RSI is needed in order to consider some type of a top.

SPX Momentum Chart
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As I suggested last Friday on Twitter & StockTwits, we have to pay close attention to the USD index since if a potential Ending Diagonal plays out then it would be reasonable to expect a pullback of the equity market (The Triangle project will probably be aborted).

Next week in the economic agenda we have as a major event risk NFP on Friday

While the equity market will remain "held hostage" by the headlines regarding the Fiscal Cliff.


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