TREND REVERSAL
Let's begin today's update with the DOW, because I think it will set the "pace" and define the EWP of the correction for the following reason.
- Yesterday's higher high kills a potential impulsive decline from last Wednesday's high, therefore I already assume that price will unfold a Zig Zag / Double ZZ or Triple ZZ.
Yesterday I mentioned that the tight Bollinger Bands were auspicating an imminent large move and that if/once a lower low was established there is nothing in the chart (Absence of supports) that can prevent a drop towards the next critical support located at the September peak = 13653.24.
- How long will the correction last?
Probably a bottom should be established either during Quarterly Opex week (March 15) or more likely in the next FOMC (March 29), which will also include a press conference by Bernanke.
- Potential target?
I am expecting a potential bottom in the range of the of the 0.382 - 0.5 retracement of the November-February up leg with an eye at the rising 20 wma which today stands at 1448. Below in the SPX weekly chart, which I posted this weekend, I have highlighted the assumed target box of this correction:
Let me now show you the internal structure of the decline of the DOW.
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The higher high is already suggesting that price will not unfold an impulsive decline. Instead a ZZ-DZZ-TZZ should be expected.
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The internal structure of yesterday's decline is neither impulsive therefore considering that we are in the initial stages of a potential meaningful correction (Patterns can morph), so far the overlapping internals are suggesting that price could be forming a bullish falling wedge (Now we would be in the wave 1 of the ED).
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Where can this first down leg bottom? Since it is corrective then when we can see either a 7 or 11 - wave move. (Now we have 7 w).
In the case of SPX, maintaining the same criteria set by the DOW, I will consider that yesterday's hod is a wave (B) belonging to a corrective EWP.
Here we could make the case that price is unfolding an impulsive wave (C) down, either we almost have the wave (3) or the wave (3) is extending (price is now on the wave (I) of (3).
Conclusion: The trend reversal is confirmed but it is not going to be a "bed of roses". It looks like price will unfold a complex corrective pattern.
Regarding the SPX potential path, as already discussed, in my opinion, price has completed with a DZZ the November-February up leg. Now I am anxiously waiting for the confirmation that price is involved in forming the Ending Diagonal option of my preferred long-term count by breaking down through the September high at 1474.51.
If this is the case the target box of the assumed wave (IV) ed is located in the range 1459 - 1437.
At yesterday eod we already have extreme bullish readings (The market is already short-term oversold:
- Eod print below the Bollinger Band
- NYSE TRIN eod print at 2.86
- NYSE TICK eod print at -843
Therefore odds are favouring a bounce attempt either today or tomorrow. Keep in mind that today Bernanke will address the House of Rep. hence if he wants he may induce a short covering bounce.
In the technical front:
- Lets monitor the McClellan Oscillator since it gives reliable clues. Here I want to highlight two issues:
- Every time it drops below the BB usually an equity rebound occurs (same day or next day).
- But I don't expect a major bounce or a bottom as long as the Stochastic enters the oversold zone and it issues a bullish cross.
- Momentum indicators are endorsing the scenario of a "large" pullback. RSI has breached the 50 line while the Stochastic is approaching the oversold zone (Hitting oversold territory does not mean the correction will be over but the odds of a rebound will increase).
Lastly VIX yesterday was the major news of the day by jumping 34%. This is not suggesting the buy the dip stuff. Instead this feels like panic is creeping in.
The January 2 gap has been closed (Now there is only "white space" until the December 28 peak at 23.20).
This one-day move is clearly overextended, but I don't expect a major retracement as long as it remains above the 200 dma and its RSI above the 50 line.
