BEARS ARE MAKING PROGRESS - I EXPECT FURTHER CORRECTIVE PRICE ACTION
My suspicion regarding the triangle formation proved to be right. On Friday bears have succeeded to break through the May 23 low at 1635.53 achieving a sequence of lower high/lower low from the May 23 high, in addition the 20 dma has been breached. This is an irrefutable argument that price is involved in a corrective phase.
Conclusion: The up leg from the April 18 low has been concluded.
If the next immediate support at 1626.74 does not hold then the correction from the May 22 high could establish a bottom in the target box outlined in the daily chart below in the range 1611 - 1597.
Going forward we have three major risks events that may create the favourable atmosphere for the resumption of the uptrend:
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June 6: ECB Rate Decision
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June 7: NFP (Bulls need a weak number)
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June 19: FOMC Policy Update (It coincides with quarterly OPEX week)
Obviously due to the concern regarding to a continued asset purchase by the FED I cannot rule out that price may unfold a holding pattern until next FOMC meeting.
The corrective internal structure of the pullback in progress (A likely Double Zig Zag) confirms that price is not involved in a major reversal; instead if my preferred count of the advance from the November is is correct (Triple Zig Zag), price is now unfolding the wave #10 (wave B), which will be followed by the last wave #11 up (wave Z):
Since the 10 wma so far has "protected" the advance from the November low, if my preferred count is correct, price should not breach with a weekly close this m.a.
Regarding the EW count of the current pullback in my opinion price is unfolding a Double Zig Zag. If this count is correct the impulsive sequence in progress from last Thursday's lower high (We are now in the wave 3) should conclude the EWP.
If the 1.618 extension target is fulfilled the current down leg could reach the 1607 area.
The collapse of the Summation index has been the major warning that price on May 22 had established a temporary top. Now we need to see the contrary to occur in order to consider viable the resumption of the uptrend.
Since the RSI has not reached yet the oversold zone (Usually the RSI remains in the oversold zone for some time) and the 10dma is far off above the index, we have to remain open-minded since the correction could require more time to unfold.
VIX could be forming two potential patterns: a Bullish Falling Wedge or a Triangle. If these patterns are not aborted the SPX Double Zig Zag count should pan out.
If the Triangle option is the correct pattern the "fear index" must not breach the trend line resistance in force since the February peak:
In the daily chart below we can see that VIX has a clear defined uptrend from the May 17 low (Higher highs/lows) while the RSI is not showing a negative divergence yet therefore it is reasonable to expect more upside if the 200 dma is not breached. Also even though it is not 100% accurate we have to be aware of the Bollinger Band equity buy signal that could be triggered with an eod print below the BB:
Sector wise I suggest to monitor:
- XLF: From the May 22 high price should unfold a Zig Zag with a potential target in the range 19.38-18.85 (1x1 or 1.618 extensions) or 19.31 (gap fill) -19.05 (0.5 retracement).
- NDX: Here the internal structure of the current pullback could unfold either a Triangle or a downward correction with a potential target in the range 2930-2911.
