As I have been discussing breadth indicators are deteriorating:
- The McClellan Oscillator is now clearly diverging from price
- The RSI is not able to move higher while the Stochastic is extremely overbought
In addition, in my opinion, SPX is carving out a topping action by forming an Ending Diagonal.
The pattern can be considered concluded at yesterday's hod.
Since, the Zig Zag up from last Tuesday's lod is a reasonable candidate for the missing wave (v) of the assumed ED.
The loss of 1467.60 may get the bull nervous.
When price completes a "bearish" rising wedge it indicates an exhaustion of the EWP carried out by the price, this is why I have been suggesting that SPX could be on the verge of a establishing the top of the wave (A) (From the November low) within a larger Zig Zag up (I am not going to explain again my reasons. If interested please read my last weekend up date and the dailies follow up published during this week).
Also a feature of an ED is that once it is finished it is usually followed by a sharp decline.
Therefore if my scenario is playing out then if the Ending Diagonal is confirmed I expect a multi-day pullback wave (B) that should reach the trend line support from the November lows.
Even though there is not a confirmed reversal yet, if today we get follow through to the down side and price will unfold the assumed wave (B) pullback then in order to estimate the potential target box I will follow the SPY daily "map" which I show below.
A wave (B) will have to break the 20 d ma = 144.80
If bears reclaim the 20 dma then I expect a potential bottom in the range of the trend line support, around the 143 area and the 0.5 retracement = 140.98
The gap fill, where we also have the 50 d ma = 142.11 could be a "sweet spot" for a bottom.
On the other hand if bears fail to reclaim the 20 dma then the most likely scenario would call for a larger extension higher of the up leg form the November low (Assumed wave A) . This is not my preferred scenario.
Regarding SPX, in the daily chart below I highlight the critical price levels and the potential target box.
Even though we do have a potential reversal pattern and price should follow the direction that breadth indicators are suggesting a note of caution is advisable as tomorrow we have OPEX and the "Big Boys" will play around their key strike prices. But hopefully by eod we should know if the ending pattern is for real.
Lastly watch VIX as it could confirm a Double Bottom. I don't consider this "small" reversal pattern to establish a major bottom (The theoretical target is at 14.77) but, once/if the Double Bottom Is confirmed, the extent of the raise will give us clues regarding the SPX down side potential.
I have established my swing long setup on SPXU.
If today price does not establish a lower low then:
- Long > 34.41
- Target = Pending to be established
- Stop < 34.03
