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SPX: Follow Up of the Short Term EWP

If the reasons I have explained in my last weekend update materialize in a large pullback remains to be seen but judging from the bulls stampede from the European equity markets which will most likely have a negative effect on the EUR, Risk ON will most likely be switched OFF (I am saying that this should be a negative for Risk Assets).

Below I show the daily chart of EUROXX 50. I have no idea regarding the count (I have not been following it) but we can clearly see that bears have inflicted serious technical damage by closing the huge January 2 gap up. There will most likely be an oversold rebound but I am confident that price will carry out at least one more large down leg.

EURO Daily Chart
Larger Image

The other major component of the bulls' "nuclear arsenal", the EUR, looks likely that it may have to correct some of the "irrational" rally. Maybe if the count that I am following the pullback will only affect at the up leg off the November 13 low, therefore price could, with a corrective EWP, move back towards the range 1.3309 - 1.3061 (My guess is a test at the 50 d ma = 1.3210).

Below I show the chart I posted yesterday when the US markets closed.

EURO Daily Chart
Larger Image

Lets move on to SPX.

Yesterday for the first time (From the December 31 low) in month price closed below the 10 dma. This is not big deal yet but certainly it is a yellow flag. (Not to mention the ugly daily candlestick)

Below I show in the daily SPX chart some interesting areas that could come into play if price confirms that a large pullback has been triggered.

SPX Daily Chart
Larger Image

Trend Reversal initial requirements:

Lower high.
Break down through the 20 d ma = 1485.25

So the uptrend from the December low is bent but not broken yet. What will change the rules of the game is when the oversold bounce will establish a lower high.

The assumed countertrend rebound could begin today given the positive divergence of an oversold Stochastic of the McClellan Oscillator, which in addition has dropped below its Bollinger band (short-term bullish sign). But the oscillator has much more room to the down side before entering the oversold zone.

NYSE McClellan Oscillator Chart

If by any chances the Ending Diagonal scenario that I am following plays out then the pullback could last into February OPEX week and the target range could be located at: 1464 - 1429.

Below I have the Ending Diagonal scenario:

SPX Weekly Chart
Larger Image

Momentum is so far aligning with the scenario of a sizeable correction:

  • RSI has reversed to the down side. The trend line from the September lows will probably not be broken at the first attempt but if a large correction is in the cards we shall see what happens once/if it reaches the 50 line

  • Stochastic is losing the 80 line. In a sizeable correction usually it reaches the oversold zone.

  • MACD is issuing a bearish signal cross.

SPX Momentum Chart
Larger Image

What is now needed is confirmation from the Summation Index. Hence we will have to wait until next Friday to see if the weekly Stochastic issues a bearish signal cross.

NYSE Summation Index Chart

Yesterday I posted on Twitter/Stocktwits a potential Double Top of NDX.

At the eod price breached the neckline of the bearish pattern.

Notice that the BB are getting very tight, often it is a signal that a large move is coming.

The Double Bottom has a theoretical target just below the 200 d ma. This area with also the huge gap fill = 2660.93 is expected to be a huge support insuperable by the bears.

NDX Daily Chart
Larger Image

But IF the triangle scenario plays out, which at the moment is just "science fiction" the correction could be around 6%.

NDX Weekly Triangle Chart
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Going back to SPX, the short-term price action is not impulsive, so we have the usual problem of having to deal with patterns that can be easily morph into something else than what initially is thought as possible.

At the moment, in my opinion, price should be on the verge of finishing a Triple Zig Zag, which I expect to be the wave (A) of a larger Zig Zag down.

SPX 5-Minute Chart
Larger Image

Again don't forget that the issue here is not where this down leg will bottom but if the following rebound will establish a lower high.

Regarding VIX, it is establishing higher lows/highs and it has reached the first resistance at 14.77, but I don't think that this is the "good move":

  • The stochastic has a bearish cross (And it is too close to the overbought zone)
  • EOD print above the Bollinger Band
  • The pattern from the lows is too overlapping.

Hence I expect a pullback. What is important, if a bearish scenario is on the cards, is to remain above the last higher low at 12.79

If a pullback occurs the next up leg will have to show fear maybe by reaching the 200 dma.

VIX Daily Chart
Larger Image

So I don't want to sound as a perma bear, but maybe this time something larger than the usual buy the dip scenario could play out.

I remain long SPXU. The stop atm is above SPX Friday's eod print.


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