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SPX: Follow Up of the Short Term EWP


If the investor behaviour is to buy with bad news, having the knowledge that Central Bankers are supporting the equity market every time there is a threat of a potential top, how can bears culminate a reversal pattern?

If you recall on February 5 a lousy NFP # was the "detonator" of an unexpected rally, yesterday a disappointing German PMI resulted in 3% rally of the DAX. In addition probable undercover activity of ECB has lowered the 10yr yields of European peripherals countries to the lowest level in more than two years. (Italy 10 yr. < 4%)

Lets move to the SPX charts.

We now have price above the 0.618 retracement of the assumed first down leg of a larger corrective pattern ===> Above 0.618 R the odds that this up leg is a wave (B) belonging to a Zig Zag down are shrinking.

Since from the April 11 high the down leg to last Thursday lod and the current up leg are corrective, EW wise the sequence so far should be (A) down (B) up which should prevent a move to new highs, instead price should be involved in a corrective pattern.

My scenario was calling for a downward EWP assuming that on April 11 price had established a "temporary" top.

Today I have to step aside from this view until I have concrete evidence that this up leg is a "bearish" wave (B) which will be followed by a an impulsive wave (C) down that will have to break through last Thursday lod.

The next resistance is located at the 0.786 retracement then we have the upper Bollinger Band at 1592 +/- and above it we have the assumed top at 1597.35

In order to consider that bulls are failing I want to see two consecutive eod prints below the 20 dma = 1566. (BTW with price back above the three major ma + and their slope remain positive it is suggesting that the trend remains up)

At the moment I have no clue how to come up with a reasonable count of the advance from the November lows if a top is not in place. What I can say is that logically if price is not involved in a Zig Zag down then this wave (B) should belong to a flat or a triangle which would mean a new higher high ahead.

For today I expect choppy price action that should result in a small range body.

SPX Daily Zoom Chart
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Regarding the labelling of the current up leg, yesterday unusual 5 min "panic" bar prevents a confident count.

Maybe if in the next few days we have a retest of yesterday's lod price could be forming a bearish rising wedge. If this ending pattern pans out then it would most likely establish a lower high reviving the option of downward correction.

SPX 30-Minute Chart
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If the price action is questioning an immediate bearish outcome Momentum and Breadth indicators are also casting serious doubts regarding the bears' aspirations.

  • Daily RSI above the 50 line and it has interrupted the sequence of lower highs.

  • Stochastic with a new bullish cross off the 20 line. In order to prevent a strengthening of upside momentum it should not cross the 50 line.

SPX Momentum Chart
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  • The McClellan Oscillator is showing another breadth thrust. Usually the next bearish set up should occur when the stochastic enters the overbought zone (Above the 80 line) and issues a bearish cross.

NYSE McClellan Oscillator Chart

VIX by losing the moving averages potential reversal zone (20 & 50 d ma) now has white space until the rising trend support in force since the March 14 low. It seems reasonable to expect a retest of this trend line in next few days.

VIX Daily Chart
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