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Weekly Technical Analysis

This weekend I will begin the Technical update reviewing one of the two Ending Diagonal options that I have discussed in my last SPX Update of the Long-Term Count on January 6.

Before analysing in detail this option just as a reminder my overall scenario remains unchanged: "From the 2000 Top price is unfolding a Double Zig Zag, therefore now price is involved in completing the wave (X). Once the wave (X) is in place price will begin to unfold the second Zig Zag down towards the 2009 lows. Therefore I dismiss any bullish scenario that implies a major break out above the 2000 top; instead I maintain the assumption that considers a move back down towards the 2009 lows once the wave (X) is complete."

Since a wave (X) is by definition a corrective countertrend move in my opinion it is reasonable to consider that from the November 2008 low price is unfolding a Double Zig Zag.

In the monthly chart below I show the overall count from the March 2000 top. In this case I am assuming that from the June 2012 low price has began an Ending Diagonal that will complete the second Zig Zag of the wave (X) establishing a Major Top.

I also highlight the eom print of August 2000 = 1517.68 as a potential magnet for the current wave (III) of the Ending Diagonal project.

Technically this is a valid option since the internal structure of the two up legs from the June 2012 are both corrective.

SPX Monthly Chart
Larger Image

Next in the weekly chart below I zoom in the time frame where price is expect to unfold the Ending Diagonal "project". As we can see from the June lows to the September peak price has unfolded the wave (I), in the following pullback price established at the November low the wave (II), and the current up leg is the assumed wave (III) of the Ending Diagonal.

SPX Weekly Double Zig Zag Chart
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If price is unfolding an Ending Diagonal then the major requirements are:

  • Wave (III) < Wave (I), therefore the maximum target of wave (III) is at 1551.12

  • Wave (IV) < Wave (II) and must overlap below the peak of the wave (I), therefore the wave (IV) will have to break through the September peak at 1474.51

  • Wave (V) < Wave (III)

Regarding the internal structure, the waves of an ED have to subdivide into a Zig Zag or a combination (Double Zig Zag).

In my opinion as I have discussed in the daily updates the assumed current wave (III) is unfolding a Double Zig Zag therefore price should still be involved in finishing the wave (A) of the second Zig Zag.

Weekly momentum is strengthening the scenario of this Ending Diagonal option:

  • RSI: There is negative divergence vs the September peak, but no divergence can be seen of the move from the November low, hence the current up leg is not expected to establish a major top.

  • Stochastic is overbought but in order to expect a sizeable pullback it has to issue a bearish signal cross and lose the 80 line.

  • As long as the MACD's bullish cross is not reversed price is not expected to embark in a major correction / trend reversal.

SPX Weekly Momentum Chart
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Below I show the potential "map" of the wave (III) and (IV) of the ED. If this scenario is correct then price should soon begin a wave (B) pullback that could revisit the September 14 high, from where it should unfold the last wave (C) of (III), hence a sizeable pullback should occur once the wave (III) is in place.

SPX Daily Double Zig Zag Ending Diagonal Chart
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I modify the two potential target boxes mentioned last Thursday for the assumed wave (B) pullback:

  • Moderate correction: 1474 - 1466

  • Larger correction: 1464 - 1451

In addition to the potential not complete EW count I consider that the up leg off the December 31 low has more business to the upside because there is no negative divergence in the daily RSI.

Regarding the short-term price action despite the fact that there is still no clear ending pattern in sight for the up leg from the December 31 low we do have increasing warnings that a pullback is due:

  • Bearish cross of the daily Stochastic:

SPX Daily Momentum Chart
Larger Image

  • Negative divergence of the McClellan Oscillator and a new bearish cross of its stochastic.

NYSE McClellan Oscillator Chart

  • Negative divergence of the 10 d ma of the NYSE Adv-Dec Volume.

NYSE Advance/Decline Volume Chart

  • VIX could be ready for a bounce:

- No lower low

- Positive divergence of the MACD histogram

- MACD is very close to issue a bullish signal cross

If the gap at 13.57 is closed then I expect at least a bounce with a target in the range 14.42 - 14.77.

VIX Daily Chart
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  • NDX: Last week's price action suggests that it has already begun a technical pullback:

-Wednesday's Spinning Top.

-Thursday's gap down = Island Reversal

If a short-term top is in place then next week price has to establish a lower high (Thursday's gap down must not be closed). If this is the case then Bears should take the opportunity to ride a move towards the range 2672.30 (200dma) - 2660.93 (January 2 huge gap fill) where I expect price to complete a shallow correction.

Likewise SPX, the overall count off the November 16 low should be a Double Zig Zag in which case price has began the wave (B) pullback of the second Zig Zag. (Blue count)

If the gap at 2660.93 is closed then instead of a Double Zig Zag the overall count would be a Zig Zag and the assumed wave (B) pullback should bottom no lower than the December 31 low. (Black count)

I consider this option less likely.

Either way, in my opinion, the EWP is suggesting that there is still a pending wave (C) up.

NDX Daily Chart
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Regarding the bigger picture for NDX I am working with the scenario of a Triangle wave (B):

If this pattern is the correct one then:

  • Likewise SPX, NDX at the October 2011 low established the wave (X).
  • At the April top the wave (A).
  • Since the April top price is unfolding a Triangle Wave (B).
  • From the November low price is tracing the wave (D) of the assumed Triangle, which should not be complete yet.
  • The top of the wave (D) of the Triangle should coincide with the top of SPX wave (III) of the Ending Diagonal.
  • The bottom of the wave (E) should coincide with SPX wave (IV) of the Ending Diagonal.
  • Once the Triangle is complete the thrust out of the Triangle = wave (C) will coincide with the final SPX wave (V) of the Ending Diagonal scenario and will establish as well a Major Top.

NDX Weekly Triangle Wave B Chart
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Regarding TWT Swing Picks on Friday I closed the UGL long position with a loss as GLD closed below the 200 dma.

So it has not been a good start for the inaugural "virtual" trading initiative. Next week I will try to be on the look out for a long set up with SPXU and or with QID (since NDX has most likely already began a correction). Today I will also analyse trading opportunities in other leveraged short etf.


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