PROBABLE KICK OFF GREED
My suspicions have proven to be correct ===> the 3-wave pullback from the April 2 high instead of evolving into a larger corrective pattern, on Friday it has been abruptly interrupted.
Don't ask me the justification behind this impressive rally, which was triggered by a lousy NFP number. (FED + Bank of Japan monthly 160 $ billions monetary stimulus).
The fact of the matter is that SPX yesterday has finally pulverized the 2007 ATH with an eod print at 1587.73.
Now the last resistance is located at the trend line that connects the 2000 top with the 2007 top at 1590 +/-.
So now it is obvious that, as I have been suggesting for a long time, from the November 16 low, price is unfolding a corrective EWP. Probably a Double Zig Zag = 7-wave legged rally.
This issue is meaningful for the long-term EWP since a corrective pattern is not expected to establish a major top (The assumed wave (X) from the 2009 lows EW wise cannot end with a corrective up leg) but this is not important now.
What matter is that if the DZZ count is correct the kick off of this new up leg, is the last wave (C) of the rally from the November lows.
If the equality extension is fulfilled it can reach 1628 (Amazing isn't it?).
Going forward I expect that this wave (C) will have to carry out a new topping process (The April 2 top process has clamorously failed by an unusual market environment).
A topping process of an almost 5 months rally will require time (Distribution) therefore most likely the next pullback will be bought once again . This top can only occur with negative divergences in breadth and momentum indicators.
In addition an extended up leg usually tops either with a Triangle or an Ending Diagonal. The previous two up legs within the November up leg have formed a wedge. Odds in my opinion favour another wedge.
For the short-term it is reasonable to expect a pullback, although for today it might be very mild as a small range body follows usually large candlesticks.
Despite yesterday's surge we don't have extremes "bearish" readings in short-term breadth indicators only the warning from the SPX candlestick above the upper BB (Not enough reason to trigger a large pullback ==> During the up leg from the February 25 lod we had 5 consecutive trading days above/at the upper Bollinger Band and the pullback began four days later).
When I say a large pullback I mean a probable move to test the previous resistance now converted into support at 1573.66.
As a general rule this new up leg will not be jeopardized until price remains above the 20 dma = 1560.
In the technical front:
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The McClellan Oscillator (Bollinger Band buy equity signal) has once again not failed in warning that the price was establishing another pivot-swing reversal. Going forward I will monitor two aspects:
- Bulls will be fine as long as the Oscillator remains above the zero line.
- This move should exhaust once the stochastic enters the overbought territory and issues a new sell signal.
- Momentum indicators have obviously reversed to the upside:
- RSI has breached its trend line resistance (A negative divergence is needed in order to consider that price is involved in a topping process)
- Stochastic after triggering a bullish cross on April 9 is now entering the overbought zone (But it can remain overbought for some time)
- MACD is at a critical juncture: Bulls need a bullish cross while bears are hoping on a failure)
Lastly VIX is maintaining a divergence with SPX but I don't see a reversal pattern in sight. Probably the best chance for the equity bears is a drop back at the March 14 low for a Double Bottom attempt.
