I MAINTAIN UNCHANGED THE CALL OF A TEMPORARY TOP
Therefore my strategy is to sell the rip.
My road map can be seen in the SPX daily chart below:
The main themes are:
- The rally from the November lows has unfolded a corrective pattern = Triple Zig Zag ===> Therefore we don't have yet the top of the wave (X) from the 2009 lows.
- Neither we do have yet the absolute confirmation that price has began a corrective phase until bears achieve to break through the support layer located in the range 1538-1531
- Once the support layer 1538-1531 is breached I expect that this pullback will find a bottom in the range 1485-1431
Before moving on with the weekly technical update I have to bring forward the following technical issues that will affect the progress of the expected pullback:
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The internal structure of the current down side price action is clearly corrective therefore every single impulsive sequence to the down side (waves C) can be the candidate to establish the end of the correction or at least it will open the door to large countertrend rebounds.
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Bears also have an issue with an already oversold McClellan oscillator and with a bullish cross of its stochastic. Therefore even if next week bears win the battle (achieving a lower high followed by a new lower low ===> My preferred scenario) the next dip of the McClellan Oscillator below the Bollinger Band will most likely trigger an oversold large counter trend rebound. (As long as the McClellan Oscillator remains below the zero line bears will remain in charge)
- As a consequence of the an already oversold McClellan Oscillator the Summation Index (weekly time frame) has issued a new sell signal at the end of March but with the weekly Stochastic in the middle line therefore the "landing run" will be shorter, Hence I don't expect a huge crash of the equity markets (The next buy signal usually occurs once the stochastic enters the oversold zone).
Daily Momentum Indicators are aligned with my bearish scenario:
- Last week assumed top was achieved with a negative divergence of the RSI (bears in order to seal the deal need a drop below the 50 line)
- The Stochastic has lost the 80 line. Usually the next large rebound or bottom will occur from the oversold zone hence it is reasonable to expect a drop below the 20 line
- The MACD sell signal issued on March 21 remain in force
Weekly Momentum Indicators have to confirm the kick off of the expected pullback:
- The RSI has to break the trend line support in force since the November lows.
- The Stochastic has to trigger a bearish cross followed by a drop at least at the 80 line.
- The MACD will dictate over the intensity of the expected pullback depending upon if it issue a bearish cross.
Lets move on to analyse the SPX charts.
Friday's reaction to a poor NFP (Investors are judging that bad economic numbers will maintain Quantitative Easing into infinity) has left in the chart a bullish Hammer which is suggesting follow through to the upside at least for next Monday.
I don't know how long the bounce will last (Attempt of the bulls to kill the bearish set up). If it is chop up and down (But below 1564) during next week then price could be forming the right shoulder of a H&S that has a target at 1505, otherwise if it is just 1-2 days rebound what really matters is a lower high.
If the bearish set up pans out, remember the oversold McClellan Oscillator, if the assumed pending down leg is impulsive it could stop either at the 0.618 retracement (1519) or at 1505 (If the H&S pans out) from where I expect a large bulls' countertrend attack.
Regarding the short-term price action, in my opinion, SPX from last week top has unfolded a Double Zig Zag wave (A) therefore the initial pattern of the expected larger correction should be a Zig Zag down.
The expected wave (B) rebound in progress can also unfold a Zig Zag since I doubt that at Friday's hod the countertrend bounce has topped, hence the potential target should be located in the 1561 +/- area. Bulls will probably try to form an inverted H&S with the neckline at 1561.78 (Eventually it should result in a bull's trap).
Regarding the long-term count, since in my opinion the up leg from the November lows is corrective, price should complete the wave (X) from the 2009 lows with an Ending Diagonal.
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IWM: Has been one of the leading indexes that warned of potential "temporary" top since while SPX achieved a higher high on April 2, the small cap etf made a lower high on March 28 followed by meaningful impulsive decline. The overall count so far can be either a Double Zig Zag (Now bouncing with a wave (X)) or a large Zig Zag (Now bouncing with a wave (2)). Either way I expect a lower high (this bounce should fail below the 0.618 retracement).
The next assumed down leg should challenge the February 26-reaction low.
- XLF: also failed to achieve a higher high but it also suggested that it was unfolding a corrective EWP. Friday's lod can be the wave (A) belonging to a Zig Zag or a Double Zig Zag, therefore if the bearish scenario that I am suggesting pans out the current bounce should fail below 18.25
- NDX: Going forward this the third stock index that I will closely monitor.
Why?
Because the 200 dma is standing above the February 26 reaction low, ONLY 2% below Friday's eod print, which should be the right spot for the kick off of a large countertrend fight from the bulls (Bottom or temporary halt of a larger corrective pattern). If eventually the 200 dma is breached it will issue a sell signal to the majority of institutional investors.
If the 200 dma is breached then maybe the large Triangle wave (B) option could pan out:
Lastly lets move on to analyse VIX.
As I have recently discussed VIX does not have a clear bullish pattern (bearish for equity). On Friday it has almost fulfilled the theoretical target of the Triangle that I have been monitoring. The huge reversal at the 200 dma forebodes more weakness at least for next Monday.
If the rising trend line in force since the March 14 lod holds then VIX could be forming a large Bearish Flag.
Here the critical level to watch is the April 3 lod at 12.62, since if my preferred scenario of an equity temporary top is correct VIX should maintain the sequence of higher lows/highs in force.
Even though apparently VIX in the worst-case short-term scenario could be just forming a bearish flag the long-term pattern may be suggesting that VIX is forming a bullish falling wedge. Maybe it is worth watching how this pattern will evolve in the next weeks.
