REVERSAL OF THE SHORT TERM TREND
We now have enough reasons to respect the fact that price is laying the foundations of a trend reversal.
Price is finally showing signs that it is giving in to the bearish pressure of momentum and breadth indicators.
Going forward the equity market is "officially" vulnerable to a meaningful correction.
When I say meaningful I mean a retracement of the November up leg. I don't expect a major reversal.
Why?
Major Reasons:
1. The up leg from the November lows has unfolded a corrective 7-wave structure ===> A corrective EWP cannot establish a major Top.
2. The current pullback is also unfolding a corrective pattern ===> The intermediate trend remains up.
3. Retails investors are extremely bearish. (I have never seen a major top with an extremely low AAII Bull ratio)
Since we are in the initial stage of a likely larger pullback it is impossible to establish beforehand where it will end. We have to locate in the chart potential areas that can act as support/reversal, Fibonacci # and moving averages.
Hence at the moment I just say that I expect a bottom in the range 1485-1440 (Probably between the 0.5 R = 1470 and the 200 dma = 1452).
As you can see in the SPX daily chart, yesterday price breached the last higher low of the November up leg (Negating another bullish extension), with an eod print below the widely watched 50 dma. It rebounded at the trend line support in force since the November 16 low.
This is a serious warning that this time bears are gaining traction.
The next support is located at 1531 then we have "white space" until 1485. (Above it we have the 0382 R at 1500 where during the expected pullback price could rebound)
Lets move on to the current price action:
I am not sure if the first down leg is already in place, yesterday's candlestick is not "bullish" but we should be pretty close (Price is tagging the lower Bollinger Band).
If a low is not in, price should find a bottom in the range 1530 - 1528.
Once a bottom is confirmed I expect a multi-day rebound that should fade no higher than the 10 dma = 1567.50 establishing a lower high.
Regarding the short-term EWP in my opinion price is unfolding a Double Zig Zag = wave (A) of a Zig Zag or a larger Double Zig Zag.
I have placed a question mark at yesterday's lod since the thrust down following a potential triangle looks too shallow (maybe it is not even impulsive). The theoretical equality extension target for the wave (Y) is located at 1530<.>
But it is less important to pick the right bottom, what really matters is the lower high in the following rebound.
If a bottom is not in place yet maybe we will have to wait to see NDX testing the 200 dma = 2721.92.
VIX should give guiding information regarding the immediate time frame scenario. Here we have a negative divergence of the RSI and a potential buy equity signal with an eod print below the BB.
If/when VIX confirms a pullback; the extent of the assumed SPX wave (B) rebound will be dictated by the magnitude of the "fear index" drop:
a) Shallow wave (B) if VIX bottoms at the 200 dma.
b) Larger wave (B) if VIX bottoms in the range of the moving averages outlined in the chart.
Anyway I expect a higher low.
Have a great weekend.
