Given the following reasons summarized below in my opinion the odds that the up leg off the November low is done are very large. The "bearish deal" will be sealed with a lower high.
Sentiment: As discussed in the weekly update on February 3 reached extreme bullish readings (AAII Bull Ratio and NAAIM Survey).
Breadth is confirming a weekly sell signal: The weekly stochastic of the Summation Index has confirmed the sell signal issued during the last week of January. The next buy signal should occur when the stochastic drops to the oversold zone.
- Momentum Indicators are now aligned with the scenario of large pullback. The RSI will have to lose the 50 line.
- European peripheral markets have most likely began a corrective phase of the up leg from the July's low. Below I show you my preferred count for IBEX.
- The EUR from the July lows with a Double Zig Zag has most likely completed a wave (A). If this count is correct price could retrace towards the 200 dma = 1.2827.
This weekend I will review the EWP, but I want to show you a potential H&S that has a projected target at 1.2880:
- SPX's wedge should have completed a Triple Zig Zag from the November lows (In my opinion the overlapping internal structure denies an impulsive count). If the up leg off the November low is corrective we already know that a major top is not in place and that it is reasonable to expect a pullback in the range of the 0.382-0.5 retracement = 1460-1437.
The new pivot support is at 1498, once/if it is breached there is only white space (Except the BB at 1491) until the next support at horizontal support which coincides with a rising 50 dma = 1474.51 If this area is also breached then my preferred long term count could pan out with a wave (IV) of the ED option.
- We have a 5-wave decline, setting the first step of a trend reversal. Once/if the current bounce off yesterday's low proves to be corrective and stalls in the range 1510-1518 establishing a lower high the Trend Reversal will be officially switched on. My preferred candidate range is 1510 (20 dma)-1514 (Previous support and 0.5 R).
- Depending where the current bounce stalls there is a potential H&S with a projected target at 1464 target.
- VIX is finally showing FEAR. After the last 2 days' surge yesterdays Shooting Star is suggesting a likely pullback but as long as long as it establishes a higher low the trend is now clearly up. The potential target may be larger that initially thought.
- We should see a flow back into bonds. In my opinion TLT (proxy for the bond market) is forming a reversal setup. Below is the TLT chart I posted yesterday on Stocktwits/Twitter (Price is not updated).
Conclusion: There are overwhelmingly reasons that are suggesting that price is involved in the initial stages of a meaningful pullback.
This weekend we have a major event risk with the Italian elections.
Enjoy the weekend.