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Weekly Technical Analysis

NEXT WEEK I EXPECT THE BEGINNING OF A PULLBACK

In all honesty Thursday's bearish set up (Daily Harami candlestick) was a feeble one due to the lack of an impulsive decline so I made a fool of myself of even pondering a potential topping pattern.

How much higher can it go without a pause?

I have no idea but the up leg from the April 18 low is extending beyond any reasonable "height" and the weekly candlestick above the upper Bollinger Band (First time since the March 2009 low) is suggesting that price has gone too far:

SPX Weekly Chart
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If the weekly candlestick above the BB means an extreme then next week odds should support the scenario of the overdue pullback. If this is the case price should be on the verge of completing the up leg from the April 18 low, in which case the best fitting pattern should be an Ending Diagonal:

SPX Ending Diagonal Chart
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If we zoom in the recent price action the ED could pan out since it fulfils EW rules:

  • Wave (I) has been established with a DZZ

  • Wave (II) has been established with a ZZ

  • Wave (III) could be in place with a ZZ

Now what is needed?

  • Wave (IV) has to overlap below 1661.49

  • Wave (V) has to unfold a corrective up leg

SPX 30-Minute Chart
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If the ED idea is wrong then the "second-stringer" count would call for the last Zig Zag higher from last Thursday reaction low:

SPX 30-Minute Triple Zig Zag Chart
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Friday's Marubozu should be followed next Monday by a narrow range body, in which case, if price is forming an ending pattern the initial down leg should occur next Tuesday.

Once/if Friday's gap at 1650.47 is closed we will have the confirmation that a correction is underway.

But if we look at next week agenda for clues of a catalyst there is nothing until next Wednesday:

  • Bernanke testimony + FOMC Minutes

  • China PMI

  • Bank of Japan meeting

For the EW reasons discussed in the daily and weekly updates I maintain the scenario of a correction instead of a major reversal.

My target box of the expected pullback has a range 20 dma = 1613 - 50 dma = 1582.

SPX 30-Minute Chart
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Although as we can see in the next weekly chart I don't expect a weekly print below the 10 wma = 1588.

SPX Weekly Chart
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But I will not maintain an aggressive bearish stance since as I have already suggested last week the McClellan Oscillator, in spite there is a troublesome disconnect between the Oscillator and price, I have not forgotten the potential buy equity signal that can be triggered when the oscillator drops below the lower Bollinger Band. (The lower BB is not too distant from current print)

NYSE McClellan Oscillator Chart

In addition to an incomplete EW count the absence of negative divergence in the weekly RSI and the Summation Index are strongly suggesting that the expected move to the down side will be just a correction but not a reversal.

Hence:

  • The weekly RSI should not breach its trend line support:

SPX Weekly Momentum Chart
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  • The Summation Index should not cross its 10dma:

NYSE Summation Index Chart

Regarding the EW count of the advance from the November low my preferred count remains unchanged ====> Triple Zig Zag.

SPX Daily from November 16 Chart
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