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Weekly Technical Analysis

In my last weekend technical update I discussed 3 potential EWP that price can unfold within the "bearish" Double Zig Zag of the wave (X):

  1. Failure to break above the September 14 high, in which case the current up leg off the November lows will stall at the September peak or establish a lower high. If this is the correct EWP then price will most likely revisit the November lows before the kick off of an impulsive wave (c) within the wave (A) of the third Zig Zag off the November 2008 low.
  2. Price breaks above the September 14 high unfolding the wave (v) of an Ending Diagonal, which will establish the top of the wave (A) of the third Zig Zag off the November 2008 low. The assumed wave (v) of the ED cannot exceed above 1551.12

Both options will have to unfold a wave (B) large pullback + the last wave (C) up in order to complete the corrective sequence of the Double Zig Zag from the November 2008 low (wave (X)).

  1. From the June lows price is unfolding with an Ending Diagonal the wave (C) of the third Zig Zag. If this is the correct pattern then price now is involved in the initial stage of the wave (III) which has to top at/below 1551.12 This Ending Diagonal will complete the DZZ of the November 2008 lows and will establish a Major Top.

(Since explaining an EWP is difficult I suggest to read my last weekend technical update posted last Sunday)

Therefore the major issue that we have to deal with is that despite price is not unfolding an impulsive up leg from the November 16 low, being corrective will not be an impediment to achieve higher prices ahead, hence we have to give priority to traditional technical analysis instruments such as breadth-momentum and sentiment indicators in order to detect the most probable outcome. Also it will be helpful to monitor the pivot resistance/support areas that are expected to propel price higher or lower if the bulls or the bears reclaim them.

The major positive for the bulls remain breadth and momentum.

  • The Summation Index has issued a buy signal during the last week of November. Its RSI has not entered yet the overbought zone; therefore, if there is not a sudden worsening, more upside should be expected.

NYSE Summation Index Chart

  • The weekly stochastic of the Summation Index so far strengthens the equity bullish scenario with a buy signal issued during the second week of November from an extreme oversold reading. Usually the weekly stochastic follows a "pendulum pattern" from oversold to overbought, therefore if this sequence is fulfilled then the equity market should not reverse to the down side until the weekly stochastic enters the overbought zone and issue a new sell signal, something that might occur in a multi-week time frame.

NYSE Summation Index  Weekly Chart

  • Weekly momentum picture: as long as the RSI remains above the 50 line and the Stochastic does not reverse the buy signal issued in the last week of November the trend remains up but in order to consider viable a sustained break out above the September high the MACD has to issue a buy signal:

SPX Weekly Momentum  Chart
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The Risk On/Off measured by the ratio of High beta / Low Beta Powershares Portfolio has improved from last week as it is breaking out from the sideways range in force since mid October.

High Beta versus Low beta Chart

But the underperformance of the technology sector remains a concerning issue:

NDX versus SPX Chart

Sentiment is neutral.

The AAII bull ratio has improved significantly from the extreme bearish readings reached in mid November. Now we are in the middle of the historical range.

AAII Bullish Ratio Chart

The 10 dma of CPCE does not give us many clues either.

CBOE Options Equity Put/Call Ratio Chart

Lets now move on to the SPX charts.

The first one is the weekly SPX chart, with the following conclusions:

  • Spinning Top = it reflects a loss of momentum
  • Minor extension above last week eow print.
  • Positives = Third week in a row above the trend line resistance off the October 2011 lows + eow print above the 10 wma (but unable to clearly close above the 20wma)
  • Pivot resistance that bulls have to reclaim is at 1422.38
  • Pivot support that bears have to reclaim is at 1388

SPX Weekly Chart
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In the next SPX chart (30 min) we can see that the move from the November 16 low is clearly corrective but unfortunately the immediate direction is not clear since several different options are possible.

Since the down leg off the December 3 peak is corrective I rule out that the EWP off the November 16 low is over.

Even if the chart looks messy I highlight 3 potential counts depending upon if two support areas holds a potential pullback next Monday located at:

  • The rising trend line that connects the November 28 low with the December 5 low
  • The December low at 1398.23

The counts are explained in the chart.

Given the clear overlapping internal structure of the move off last Wednesday low I lean towards a pullback starting next Monday, but it is unpredictable how the market will behave in front of next Wednesday FOMC day.

SPX 30-Minute Chart
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Finally in the daily chart I highlight the key support #, while above Friday's eod print (which is above the 50 dma) we can see that if bulls are able to achieve a break out above the next resistance located in the area of 1423.73 – 1424.34, then they will not have any obstacles to reach the next resistance located in the area of 1433.

The cluster of resistance located at the November 6 peak (Bollinger Band + Trend line resistance) can be a reversal point provided we have negative divergences and an overbought Summation index otherwise this corrective pattern could morph into a larger Zig Zag or Double Zig Zag aiming at the September 14 high during the month of January.

SPX Daily Chart
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Regarding the daily momentum, the RSI so far has no negative divergence while the Stochastic is overbought and giving whipsaws signals while the MACD is crossing the zero line (Another positive for the bulls).

For the short term as long as the Stochastic does not cross the 80 line I rule out a meaningful pullback while the RSI 50 line remains the "line in the sand" between bulls and bears.

SPX Momentum Chart
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The NYSE Adv-Dec volume could be shaping a contracting pattern that would be aligned with a potential pullback sometime next week followed by thrust higher.

NYSE Advance/Decline Volume Chart

VIX with Friday's Inverted Hammer is also suggesting a potential rebound next week but within a "speculative" Bearish Flag:

VIX Daily Chart
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Lastly to make things a bit more complex, last week the EUR had an abrupt reversal with a 5-wave decline that can be a trend changer.

With an impulsive sequence completed, a multi day bounce will most likely be followed by at least one more large down leg. If the "countertrend" bounce is strong enough to reach the 1.3000 area then price could be forming the right shoulder of a H&S pattern that could carry price back towards the November lows.

It remains to be seen how the equity bulls will digest a strong USD

Euro 60-Minute Chart
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Next week the main risk event is on Wednesday with the FOMC monetary policy announcement, in addition the market remains "hostage" of the US "Fiscal Cliff" political battle between Democrats and Republicans. The dead line is on Monday January 31, but if Mr Obama wants to leave for the Christmas holidays an agreement must be reached by Friday December 21, which also coincides with Quarterly OPEX.

Conclusion:

Regardless of a potential "shallow" pullback next week I maintain a bullish bias (until technical evidence shifts to the bears camp) since the pattern off the November lows is not complete yet.

 

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