In my opinion SPX last Tuesday has established a short-term top.
As I mentioned yesterday the internal structure of the pullback in progress is clearly corrective.
So far at yesterday's lod I can count a complete Double Zig Zag that should have established the bottom of the wave (A) of a larger Zig Zag down. If this short-term scenario plays out then obviously bulls have to fail on any rebound attempt establishing a lower high, in which case despite being a corrective pattern the short-term trend will be officially declared DOWN.
I know that it would have been much more pleasing an impulsive down leg since it would have guaranteed more down side action (Not because I am a perma bear but because it would allow an easier management of the down side action), but if the overall count from the November lows has one more pending wave (C) up then this pullback can be the initial stage of a wave (B) correction. In other words price should "only" retrace a segment of the last up leg from the December lows.
Objectively even if at the moment I should not reed too many bearish conclusions from yesterday's price action (probably induced by month-end apathy) we have further evidence from momentum and breadth indicators that price should soon confirm a short-term reversal.
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RSI has confirmed a DT and it has breached the rising trend line support of the January's lows. Now it should not be an utopia to expect a drop towards the major trend line support in force since the November lows.
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Stochastic has issued a new bearish cross.
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MACD will most likely join the stochastic with a new bearish signal cross if SPX carries out another down leg (This is what I am looking for).
- The McClellan Oscillator has crossed the zero line (Issuing a big yellow flag).
Before looking at the short price action in more detail, I remind that if by any chance the Ending Diagonal scenario that I am working with is playing out then price from the November lows is unfolding the wave (III)
If we look at the SPX weekly chart below so far we have a weekly small range body that could shape a bearish 2 weeks candlesticks named Evening Shooting Star', of course substantial weakness is required next week.
If price will confirm the reversal then we can see 3 important support lines where a wave (B) should bottom: 1474.51 (September peak), 1463.76 (Horizontal support) or 1450.44 (10 wma).
Regarding the short-term time frame there is an obvious Head & Shoulder pattern, with the right shoulder under construction (provided price remains below the 1504 area) that has a target at 1483.66.
Regardless of the H&S, 1504 remains a critical number since at 1504.53 we have the 0.618 retracement of the assumed wave (A), which should not be breached by a wave (B) bounce.
If bulls reclaim the 0.618 retracement then the bearish setup could be seriously jeopardized.
If the price confirms that the current bounce is a wave (B) then I would expect that the wave (C) down will at least be equal the previous wave (A) = 12.60 points.
Once the wave (C) is in place I will try to assess the probability of more down side potential or if the correction can be considered over.
Lastly in the daily chart below we can see that it is not unintentional where price bottomed yesterday, at the 10 dma.
The loss of the 10 dma will most likely confirm the expected trend reversal and it will open the door to a quick down move towards the 20 dma = 1481.30, which is the first potential target for the assumed wave (B).
I highlight 3 potential target boxes:
- 20dma (1481.30) - 1474.51
- 1474.51 - 1463.76
- 1463.76 - 1451.54
Today we have NFP.
Have a great weekend.
