KEY TIME
Yesterday we got the expected small range body, a text book Gravestone Doji, with the high of the day almost at the 0.786 retracement.
The G Doji + 0.786 R can suggest a potential topping area only if bears achieve an impulsive decline.
If this is the case, then the bearish scenario of a Zig Zag down (On April 11 SPX has established a temporary top) will be revived as the most probable outcome.
Keep in mind that so far from the April 11 high we have:
1. Corrective decline to the April 18 lod = Wave (A)
2. Corrective rebound in progress = Wave (B)
So I am confident that the current up leg should not allow the resumption of the initially thought completed advance from the November lows. Therefore if price has in the cards a new higher high it should carry out a larger corrective pattern: either a Flat or a Triangle.
Therefore this up leg can belong to:
1. Bearish patterns:
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Wave (B), which belongs to a Zig Zag. (The most likely out come is shown in the chart above)
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The wave (B) is not done yet, instead it will top at the previous high (Double Top). If this is the case then the DT has a target at 1475:
- Wave (a) of a contracting pattern (Triangle) that will establish the wave (B) of a Zig Zag or Double Zig Zag:
Now lets have a look at the bullish options:
2. Bullish patterns:
- Flat wave (B):
- Triangle wave (B):
Which patterns will prevail?
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If today bears achieve an impulsive decline then the bearish pattern will most likely be the correct one. (Zig Zag)
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Otherwise we have to monitor the internal structure of the following moves and breadth-momentum indicators. Mainly three indicators should give us clues:
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Summation Index: bullish cross or failure to cross the 10 dma.
- MACD: bullish cross or failure:
- McClellan Oscillator: The stochastic is entering the overbought zone but no bearish cross yet. The pattern of higher highs/lows is supportive of the bullish options as long as it remains above the zero line.
In addition I suggest watching closely the EUR since it could be on the verge of confirming an "unexpected" bullish Zig Zag up. A new up leg of the EUR will strengthen the SPX bullish options.
Regarding the labelling of the current up leg, bearing in mind that Tuesday's 5 min "panic" bar distorts a comprehensive and confident count, we can make the case that price has completed a Zig Zag.
Recall that in order to be the bearish wave (B) bears need an impulsive decline otherwise price would be forming one of the patterns discussed above.
