DOWNWARD OR CONTRACTING CORRECTION?
Last week Bernanke's Testimony and the FED minutes have been the catalysts that have kicked off the overdue correction.
I rule out that the current pullback belongs to a major reversal pattern; instead I expect a retracement of the up leg from the April 18 low.
1. Logical considerations:
It is blindingly obvious that as long as Central Bankers do not change their policy of flooding the system with liquidity it is a "chimera" to consider last Wednesday's high as a meaningful top.
Without negative divergences in both long-term momentum (Weekly RSI) and breadth (Summation Index) indicators it is unlikely that a strong up trend can abruptly come to an end without a topping process.
2. Elliott Wave reasons:
The up leg from the April 18 low has not unfolded an impulsive structure therefore it cannot conclude an EWP.
The advance from the November lows should unfold an 11 -wave structure, therefore there is still one missing up leg.
Therefore as I mentioned last Thursday: "The current down leg can either unfold a downward pattern (Zig Zag / Double Zig Zag / Triple Zig Zag) like the four previous ones or a sideways pattern that could form a triangle, in which case it will require a longer time period to be shaped. Going forward since major market players are clearly sensitive to a continued asset purchase by the FED, strong economic numbers will have a negative impact while weak ones will maintain alive the hope of QE into infinity."
Two major risk events can favour the end of this corrective phase:
June 7 NFP.
June 19 FOMC (Which in addition coincides with quarterly OPEX week).
Hence if the correction lasts until the next NFP release a downward correction is more probable while if major market players decide to wait until the FOMC meeting then a Triangle could become the most likely scenario.
Maybe if we take into account the alternation guideline, given that the four previous corrections occurred during the advance from the November low have unfolded ZZ & DZZ a Triangle could pan out.
The maximum downside target should be located at the trend line support in force since the November 16 low. (Wave C of a Zig Zag; Wave Y of a Double Zig Zag or the wave A of a Triangle)
If my preferred count plays out then once we have the wave #11 in place I expect a multi-week correction that should not breach the 200 dma which today stands at 1485.
Lets review the long-term pattern:
It is a possibility that the "Countertrend" rally from the March 2009 low is forming a bearish rising wedge. If this is the case SPX is now involved in the last phase of the assumed wave (X):
As I have been suggesting for a long time the assumed wave (X) could be unfolding a Triple Zig Zag, in which case the last wave (Z) should form an Ending Diagonal:
If the Ending Diagonal idea is correct in the next weekly chart we have a potential "road map" for the assumed wave (I) and wave (II):
Lets move on to the analysis of the short-term time frame:
In my opinion on May 22 price has concluded with a TZZ the wave #10 (Wave A), therefore in agreement with the scenario discussed above price should unfold at least a 3-wave down leg that could establish the end of the correction (Zig Zag) of the wave (A) of the Triangle option.
Last Thursday price has established the first down leg at 1635.53
From last Thursday's lod the internal structure of the bounce is clearly corrective, but probably not over yet.
Once the wave (B) is in place I expect a wave (C) down that could reach the 0.5 retracement at 1612.
Regarding the pattern that the assumed wave (B) is unfolding I would not rule out a Triangle if Friday's gap down at 1650.51 is not closed. (The overlapping bounce off Friday's lod reduces the probability of a Zig Zag higher)
I don't know if the second leg down will conclude the correction but I do expect at least a strong rebound attempt. The major reason is due to an already oversold McClellan Oscillator.
Lastly if VIX is forming a bullish falling wedge we already know that SPX will not carry out a sharp drop since it should not breach either the black trend line or the red one (Potential triangle). However this pattern would be aligned with the scenario of a large equity pullback once the assumed SPX wave 11 is in place.
Regarding the short-term time frame I expect at least one more up leg that could reach the Trend Line resistance from the December peak, either from Thursday's gap fill (13.59) or from the target box marked by the 50 dma and 20 dma (13.51-13.20).
Next Monday US markets are closed (Not ES Globex).