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Weekly Technical Analysis

Despite a scary 50 points drop during Friday's ES Globex session and a potential truncated Ending Diagonal, bears have not been able to achieve a significant lower low and in addition the internal structure of the pullback is clearly corrective hence we don't have yet the confirmation of the reversal of the trend of the up leg from the November 16 low.

But the up leg off the November lows is now mature, in my opinion the EWP has reached a full natural growth that should soon lead to at least a retracement.

This weekend I will begin my weekly technical update analysing sentiment, breadth momentum and Risk on/ Risk off indicators since we definitely have several heads up that are suggesting that even if the Ending Diagonal that I have been following is aborted the top of the November-December rally should not be too far away.

Sentiment:

  • AAII Bull Ratio is approaching bullish extreme reading, but it has not reached yet the "radical" area where usually bulls are fatally overwhelmed

AAII Bull Ratio  Chart

  • 10 dma of CPCE is approaching the overcrowded bullish zone (It should drop a bit more)

CBOE options Equity Put/Call Ratio Chart

Breadth (longer-term)

  • The RSI of the Summation Index is entering the overbought zone = Heads up

NYSE Summation Index Chart

  • The weekly Stochastic of the Summation Index has entered the overbought zone. When the D line also enters inside the overbought territory then odds of a multi-week sell signal will substantially increase = Heads up

NYSE Weekly Summation Index Chart

Breadth (shorter-term)

  • McClellan Oscillator: Last Monday the Stochastic issued a buy signal from an oversold reading but this week thrust has established a lower high suggesting that bullish momentum is waning = Head up

NYSE McClellan Oscillator Chart

In addition from the November 29 peak the Oscillator is establishing a sequence of lower high/low. If next week the McClellan oscillator does not breach the trend line resistance and instead it loses the zero line then the odds of a trend reversal will substantially increase.

NYSE McClellan Oscillator Chart

  • NYSE Adv.-Dec. Volume

On Friday we had the strongest ratio of the year which can only be considered as a huge distribution day = Heads up.

NYSE Advance Decline Volume Chart

Momentum:

  • Weekly: remains bullish as long as the RSI does not breach the trend line support in force since the November 16 low and the Stochastic does not reverse the buy signal issued in the last week of November. 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
Larger Image

  • Daily: The RSI has breached the trend line support in force since the November 15 low and the Stochastic has issued a news sell signal and it has breached the 80 line (from the overbought zone) = Heads up.

SPX Daily Momentum Chart
Larger Image

Risk on / Risk off indicators:

  • SPX:TLT ratio: Last week the Stochastic has triggered a bearish cross has it has breached the 80 line but the ratio has to break down the trend line support in force since the November lows in order to consider that in the next few weeks market players are dumping stocks and buying bonds.

SPX versus TLT Chart

  • High Beta:Low Beta ratio: is too stretched suggesting that inventors may now seek more defensive strategies.

SPX High-Beta Low-Beta Chart

  • NDX:SPX ratio is not inspiring any confidence that the technology sector is capable of leading the equity market higher.

SPX versus NDX Chart

  • VIX:SPX ratio from the November low is establishing higher highs/lows. This trend is not consistent with bullish market behaviour.

SPX versus VIX Chart

Conclusion:

The bullish case is no longer the dominant scenario.

But the reminder of the year has a powerful influence with the "omnipresent" Santa's rally that "usually" should begin next week and lasts until the second trading day January which given that bears have not been able inflict a death blow may still allow a final push higher.

So lets move on to analyse the short-term price action.

Lets begin with a 5 min SPX chart.

Here we can see that despite the initial sell off, bears have only been able to achieve a 3-wave down leg, which is not a wave structure in agreement with a trend reversal.

SPX 5-Minute Chart
Larger Image

Anyway given the corrective look of the bounce off Friday's lod, in my opinion the EWP of the pullback is not over. Instead I expect either a Zig Zag or a Double Zig Zag down, with another theoretical 21 points down leg. As long as the last higher low at 1428.33 is not breached the corrective bounce could have another push higher but I doubt the bulls will be able to reclaim the 0.618 retracement at 1435.61.

As you know, last week I have been suggesting that price was unfolding an Ending Diagonal.

SPX 30-Minute Chart
Larger Image

This pattern is still a valid option but given the corrective internal structure of the pullback from last Thursday's assumed top of the truncated wave (V), price it is already giving valuable information regarding the larger time frame pattern from the September high, since a corrective down leg is not coherent with the scenario of a Flat/Running Flat as a wave (C) has to be impulsive, unless price has in mind to unfold a large Triangle, but at the moment it is too premature to consider this scenario:

SPX 120-Minute Chart
Larger Image

Therefore if the Truncated Ending Diagonal is the correct pattern then price has completed a Zig Zag form the November 16 low and the current pullback is expected to unfold another corrective pattern with a target in the range of the 0.382-0.618 Fibonacci retracement.

This scenario could belong to the two Ending Diagonal options (Break out above the September high scenarios) I have been discussing in my last weekend technical analysis and on October 28 up date of the Long Term EWP scenarios.

Below are the 2 Ending Diagonal options (prices are not updated):

  • Ending Diagonal Wave (C) option:

(Now unfolding the wave V)

SPX Monthly Chart
Larger Image

  • Ending Diagonal Wave (C) option:

(Now unfolding the wave III)

SPX Weekly Chart
Larger Image

Lets go back to the short-term time frame.

As I mentioned above due to the fact that the current pullback is not impulsive and bears have not inflicted yet any technical damage, as long as price does not breach the new pivot support located at 1411,88 price could be unfolding a contracting pattern with a final thrust higher that should coincide with news from the Fiscal Cliff agreement.

SPX   60-Minute Chart
Larger Image

If the Triangle plays out the thrust out of this assumed contracting pattern would complete the Triple Zig Zag count I was working with before switching to the Ending Diagonal option.

The assumed pending wave (Z) has a theoretical extension of 40 points hence price should establish the end of the up leg off the November lows below the September high.

If this is the correct pattern once the wave (Z) is in place then I expect a multi-week pullback, the internal structure + information given by breadth & momentum indicators will give us clues regarding the larger time frame scenarios (Flat/Running Flat or Ending Diagonal options)

Lastly in order not to lose the sight of the EWP from the September high in the daily SPX chart below we can see that so far there is no technical damage to the November's corrective rally:

  • From the December 18 peak the 3 daily candlesticks (up + down + up) are suggesting just a pullback
  • Price is above the 3 major ma
  • Again as long as bears do not break down thorough the pivot support located at 1411.88 I cannot rule out a final wave up that can exhaust at the trend line resistance #2 or below the September high.

SPX Daily Chart
Larger Image

If you ask me which of the 2 short term options I prefer, since SPX has more lives than a dead cat, I lean with the scenario that calls for one more pending up leg.

So to conclude if a top is not already in place and the market follows the Santa bullish script, even though the Risk/Reward is clearly leaning to the bearish side, let the bulls have their final "climax explosive" move higher.

Enjoy the weekend and I wish everyone Merry Christmas and a wonderful Happy Holiday.

Next week I will take a break. I will be back on January 3.

 

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