CONFLICTING SIGNALS: STRONG BREADTH vs WEAK MOMENTUM
1. Weekly momentum indicators are suggesting that the advance from the November low should be over:
- The RSI has breached the trend line support in force since the November lows.
If price has not completed yet an ending pattern (My preferred scenario) then we should see a negative divergence during the last wave up. (Terminal pattern)
- On April 5 the Stochastic has triggered a bearish cross.
2. The Summation Index, last week, has issued a buy signal by crossing above its 10 dma. Theoretically, since this buy signal has been triggered with an oversold RSI an immediate roll over would be odd. The firmness of this bullish signal will depend upon if the RSI crosses the middle line.
3. Despite the breadth thrust the daily RSI remains far from its April 11 peak (Potential negative divergence), however the Stochastic is not overbought, therefore going forward as long as its bullish cross is not reversed the up trend will not be endangered.
4. The NYSE 10 dma of the Adv-Dec Volume is showing feeble buying pressure in this rally attempt. (From the April 18 low)
Conclusion: The persistent and unremitting advance from the November lows is most likely not over yet, but we have to be open minded and monitor if with new highs breadth and momentum indicators do not confirm (Negative divergences), hence price should be forming an ending pattern.
In addition to the absence of an ending pattern two issues should favour more upside for the equity markets:
- EURUSD: The internal structure (Corrective) of the pullback from the April 16 peak is suggesting that price should unfold a Zig Zag from the April 4 low; hence a pending wave (C) up could reach the 0.618 retracement located at 1.3342 before the resumption of a large corrective pattern from the February 1 top. A strong EUR usually favours the equity markets:
- Bund: If a potential bearish rising wedge pans out a Bund sell off should propel at least European equities higher.
Lets move to the SPX charts.
- Long-term scenario ===> No change:
I maintain the Triple Zig Zag wave (X) scenario. As I have discussed in previous weekly updates since the advance from the November lows is not impulsive (Assumed wave Z) I am suggesting that it should unfold an Ending Diagonal, if this is the case price is involved in the late stages of the wave (I).
- EWP of the advance from the November lows:
Since the pullback from last Thursday's high is not impulsive I rule out that on April 11 price has completed the advance from the November low. (Unless it is unfolding a bearish Triangle wave B)
Therefore in my opinion we have the following options:
- Triple Zig Zag: From the April 18 low price has began the last Zig Zag. If this is the case the current pullback is the wave (B) that should bottom no lower than the trend line support in force since the November 16 low, from where the last wave (Z) up could reach the 1620 +/- area.
- Double Zig Zag: From the April 18 low price will unfold the last wave (Y) with an Ending Diagonal
- Double Zig Zag: A contracting pattern (Triangle) will establish the wave (B) of the second Zig Zag, which will be followed by the last wave (Y) up with a theoretical target in the area of 1635 +/-.
Regarding the short-term scenario due to an overbought McClellan Oscillator the pullback (Corrective) that began last Thursday should have more follow through to the down side. The down side potential will depend upon if the Stochastic loses the 80 line and if the Oscillator remains above the zero line.
If a larger pullback is underway I expect a bottom in the range of 1571 - 1563. (I would not rule out a test of last Tuesday's "panic low at 1563.")
If the price breached the 0.618 retracement at 1558 then the Triangle scenario could become the front-runner option.
Next week I am going to monitor XLF since maybe price is forming an Ending Diagonal. If this scenario is correct the current pullback (Assumed wave IV) should not close the gap at 18.10.
Regarding the long-term count, here I am working with a Double Zig Zag. If this is the case price is establishing the wave (A) of the second Zig Zag. The following wave (B) correction should not breach the rising trend line support in force since the March 2009 low. The theoretical target for the final wave (Y) (1 x 1 extension) is located at 21.53.
In the following monthly chart we can see that it is feasible that corrective pattern off the March 2009 lows could top in the outlined target box.
Next week we have three major risk events:
- May 1: FOMC Policy Update.
- May 2: ECB Meeting
- May 3: NFP
