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My goal is to establish the most likely path that the price of a particular asset will undertake and profit through ETF instruments both on…

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SPX: Follow Up of the Short Term EWP


Today I don't have much to add to what have been discussing since my last weekly update.

I am confident that the EWP from the November lows is not over yet, but the two potential outcomes which will open the door to the last wave up are still uncertain, I am referring to a contracting pattern (Triangle) or a downward pattern (Double Zig Zag).

Yesterday I mentioned that a potential H&S could have kicked off the Double Zig Zag option but yesterday's bounce is too large to be considered the right shoulder, in contrast it is too shallow to be considered the wave (D) of the Triangle, Hence the end result of this choppy price action is still undefined.

If the Triangle is the correct pattern then I would expect one more up leg with a target in the 1667 area (In order to have the correct look), if this is the case yesterday's gap at 1648.36 should no be closed.

If the Triangle pans out then the following thrust (Assumed wave Z from the November low) will complete the advance from the November lows with a theoretical target in the range 1705 -1715.

SPX 15-Minute Chart
Larger Image

It is just a personal feeling but since most of the planet is now looking at the triangle idea maybe instead of the wave (D) price is unfolding the wave (B) of the Double Zig Zag option.

If this is the case the common extensions target would have a range 1623 - 1593 (Although I don't expect a weekly close below the 10 wma which today stands at 1607).

Probably this pattern should last at least until next Friday (NFP release).

SPX 15-Minute Double Zig Zag Chart
Larger Image

How can we know in advance which pattern is the correct one?

Clearly the DZZ options needs an impulsive decline and an eod print below the 20 dma = 1643. The definite blow will be achieved with a new lower low since I guess there must be tons of sell stops below 1635.

If in the contrary the sequence of higher lows/highs is maintained then the Triangle will be the correct pattern.

SPX Daily Chart
Larger Image

I have discussed that Momentum and Breadth indicators are aligned with the scenario of a deeper pullback. We can add to the list a potential weekly sell signal of the Summation Index:

NYSE Summation Index Weekly Chart

Recently the market behaviour is resulting in odds readings from short-term breadth and sentiment indicators. On Wednesday with a weak market, TRIN closed at an extreme overbought reading. Yesterday despite a choppy price action the Equity Put/Call Ratio ended the day with the lowest reading since November 2012 (Contrarian Indicator). It seems probable that the majority of the investors may be caught wrong footed by the next directional move.

CBOE Options Equity Put/Call Ratio Chart

Going forward I will monitor the McClellan Oscillator, since it is a fact that it is oversold and sooner or later it will explode to the upside (Breadth thrust). For this reason we need to watch if it is forming a base (By breaking the sequence of lower highs) or despite being oversold it will establish lower lows (Double Zig Zag option).

As long as the trend line resistance is not breached odds favour more weakness.

NYSE McClallan Oscillator Chart

VIX remains aligned with the DZZ option as long as the sequence of higher highs/lows from the May 17 low is maintained. So far in my opinion it seems more probable a move towards the trend line resistance in force since the December peak.

VIX Daily Chart
Larger Image

Sector wise I will be monitoring XLF for two reasons:

  • Here the Triangle is not applicable.
  • It would be odd that with just one legged structure a bottom is already in place.

Therefore It seems reasonable to expect at least one more down leg with a potential target at the gap = 19.31.

XLF Daily Chart
Larger Image

Enjoy the weekend.


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