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Weekly Technical Analysis

This weekend I will begin my weekly technical update with a look at the bigger picture EWP of 5 major US equity sectors in order to demonstrate with EW evidence the validity of my hypothesis regarding:

  • The corrective nature of the internal structure of the entire move from the 2009 lows (Counter trend move which in the case of SPX I label it as a wave (X)).
  • The likelihood that the pattern is not complete yet, but the price could be involved in the later stages.
  • During the first quarter of 2013 the US equity market could establish a major TOP.

Obviously the November lows represent the line in the sand. Therefore as long as bears are not able to reclaim SPX 1343 my preferred scenario will not be invalidated.

1. Financial Sector (XLF)

From the July 2011 lows price should be unfolding a Double Zig Zag, hence as long as the November lows are not breached the EWP needs one more up leg in order to be considered complete. It is not clear yet if the missing wave (C) is already in progress or if price will unfold a Flat/Triangle first. Given the corrective look of the move off the November lows I prefer the latter option.

The clear 3 wave down leg off the September peak invalidates the perma bearish options.

If the large bearish rising wedge looking pattern (From the July lows) is maintained then the upside potential of the missing wave (C) will be shallow, otherwise I would be expecting the 1x1 extension target (+3.14 = length of the wave A).

XLF Weekly Chart
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2. Energy Sector (XLE)

I am "working with the same count as XLF (Double Zig Zag), but for the XLE, as long as bulls do not reclaim the 73-resistance area the risk of breaching the November lows is higher with a wave (B) that could bottom at the rising trend line from the October 2011 low.

XLE Weekly Chart
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3. Dow Jones Transport

A sideways pattern is in force since the June lows. This is not what a bear market would be unfolding, hence there should be at least one more up leg in the cards (wave C).

Dow Jones Transports Weekly Chart
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4. SMH

Price could be unfolding a small Triangle wave (B) or a larger one, either way; in my opinion the pattern suggests higher prices ahead.

SMH Weekly Chart
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5. NDX

The EWP of the Technology sector (NDX) is not clear. Even though price should not have established a major top yet, its pattern can result in different several outcomes: Flat (Red count); Triangle (Dark blue count) or even an Ending Diagonal (Black count).

NDX Weekly Chart
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Going forward I will open a thread for these sectors in order to monitor how the patterns evolve.

Conclusion:

  • The EWP of these 5 major US equity sectors suggest that price has more business to the upside in order to complete a corrective move and establish a potential major top.
  • It is not clear that the corresponding waves (C) up have already began. (The overlapping internal structures of the November up legs + across de board weekly shooting stars cast serious doubts).

The underperformance of NDX is obviously an issue that must be resolved by the equity bulls.

The NDX:SPX ratio gives a clear proof of the weakness of the Technology sector, as the ratio is making lower lows. The only hope is that as the Stochastic is entering the oversold zone demand for technology stocks may increase.

NDX versus SPX Chart

Lastly, regarding the SPX big picture, I have to add an option than would move forward the end of the bearish wave (X) if price with an Ending Diagonal from the June lows completes a Zig Zag off the March 09 lows. This Ending Diagonal project can pan out if price does not breach the trend line that connects the June-November lows and the assumed pending wave (V) does not extend above 1551.12.

SPX Monthly Zig Zag Chart
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I add this bearish option, not because today I woke up with bearish feelings, but because the monthly momentum indicators, especially the RSI negative divergence in force since the April 2011 peak and the nearness of the major support trend line provide a serious warning that the intermediate up trend could be seriously wounded if the upper trend line of the RSI is not soon breached. In addition we have the Stochastic with a sell signal issued last month and the MACD signal cross which is very close to a potential bearish cross.

SPX Momentum Chart
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As I always reiterate EW counting is not an exact science, price is wise and especially in a manipulated market, patterns have the ability to easily morph into something else, but since this countertrend rally is mature I will remain open minded and at each new higher high I will be watching breadth an momentum indicators to see if we have overbought readings and negative divergences, probably one of the few variables that cannot be manipulated, for warnings of a potential Major Top.

As you know I like to monitor the weekly stochastic of the Summation Index ("Pendulum" pattern: from oversold to overbought sequence). The "fast" line is already entering the overbought zone, but the "slow" line is still lagging behind. When both lines of the Stochastic are inside the overbought zone then a weekly sell signal can be issued, this may still need a few more weeks to occur.

NYSE Summation Index Chart

Sentiment is the other major variable that must be monitored. The AAII Bull Ratio is on the rise since it dropped to an extreme bearish reading in November, but it has not reached yet the bullish extremes that usually accompany a major reversal.

AAII Bull Ratio Chart

So at the moment bulls should not be in a dangerous position.

Now lets move on to analyse SPX price action.

SPX ended the week with a bearish Shooting Star, which does not give any bullish vibration at all. This candlestick indicates that bullish momentum is running out of steam. Price is clearly capped between the resistance at 1434 and the pivot support at 1398.

However, even though I cannot rule out that SPX may be vulnerable for more short-term weakness, both the internal structure of the November up leg, which in my opinion is not complete yet and the clear corrective nature of the current pullback increase the odds that price during the current pullback will bottom above the pivot support located at 1398.

If my short-term count is wrong I still believe that price will establish a higher low above the November 16 reaction low, probably no lower than the 50 wma = 1378.50 (keep in mind that the 200 dma = 1387.50).

By the end of next week, if as I believe, the correction is close to an end price should establish an eow print above the 10 wma = 1408.50.

Also if the market follows the typical seasonal pattern, then next week is the last chance for the bears to inflict technical damage since Santa's rally usually begins in the last 5 trading days of the year and continue until the second trading day of January.

SPX Weekly Chart
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As I have discussed several times SPX has to possible outcomes:

  • The corrective pattern from the September 14 high is still in progress in which case price is now unfolding a countertrend wave (B) that will fail below or at the September peak. If this is the correct pattern once the wave (B) is in place the November low will be revisited, although I don't know if price will establish a higher or a lower low. To keep things easy lets call this potential pattern a Flat correction, which will open the door to the resumption of the intermediate up trend.
  • Despite the internal structure of the move from the November low is clearly corrective I cannot rule out that price will break above the September high with either a wave (V) or a wave (III) of an Ending Diagonal. Obviously if this is the correct scenario the assumed up leg of the Ending Diagonal will have to unfold a corrective ZZ of DZZ, hence the November up leg will be the wave (A) of a larger ZZ up (price will maintain a sequence of higher highs/lows and the 200 dma will not be breached).

(I reviewed the long-term options in the weekly analysis on December 2)

So despite the weekly bearish Shooting Star I believe that price has not established yet the top of the wave (B) scenario nor it has completed yet the first up leg of the wave (III) / wave (V) of the Ending Diagonal scenarios.

Therefore as long as price remains in the range of the 20 dma = 1407 and the pivot support at 1398 I will not modify the short-term preferred scenario that calls for at least one more up leg with a potential target in the range = 0.786 retracement = 1446.

Then we will have to monitor the following pullback and the support areas.

In the SPX 5 min chart below we can see that price is not unfolding an impulsive down leg, hence as I mentioned above I rule out that the November up leg is over, instead my preferred count call for a Double Zig Zag in which case a five wave decline off 1418.14 will complete the pattern (blue count) or an almost complete Ending Diagonal will complete a Zig Zag (Black count).

SPX 5-Minute Chart
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In addition to my preferred short-term EW count which assumes that price is involved in the last stage of the pullback, in which case the 20 dma = 1407 should hold (eod print) we have:

  • Positive divergence of the NYSE Adv-Dec Volume:

NYSE Advance/Decline Volume Chart

  • The Stochastic of the McClellan Oscillator is now extremely oversold hence the odds of at least a multi-day rebound of the Oscillator are large (Although a bullish cross is needed).

NYSE McClellan Oscillator Chart

It is not necessary to repeat that if in the assumed next up leg we see negative divergence then the scenario of the "bearish" wave (B) will substantially strengthen.

Lastly the two Risk On/Risk OFF indicators that I have been following are not bullish friendly anymore:

  • SPX:TLT Ratio. This ratio has been rising off the mid November lows but last week with an overbought Stochastic it has reversed to the down side breaching its trend line support. Keep in mind that when this ratio falls it means that bonds are in greater demand than stocks. It now remains to be seen if the ratio will hold above the middle line of the Bollinger Band allowing the equity market to achieve one more up leg into year-end.

SPX versus TLT Chart

  • High Beta:Low Beta Ratio. It is now quite stretched in addition the Stochastic, which is overbought, has negative divergence and it has issued a bearish cross. Therefore SPX in order to achieve a substantial break out above the 1435 resistance it will need rotation into a new sector that has to lead the equity market higher.

SPX High Beta Chart

And of course VIX has to confirm my short-term bullish scenario.

On Friday it has broken a trend line resistance but it could be now unfolding another bearish Flag. Lets watch if it fails or not at the 200 dma + the potential sell equity signal given by an eod print above the BB followed by an eod print below the BB.

VIX Daily Chart
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Next week the main risk event is Friday's Quarterly OPEX and news from the Fiscal Cliff negotiations.

 

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