THE MOST LIKELY SCENARIO REMAINS A ZIG ZAG DOWN. BUT BERNANKE CAN DERAIL THE PATTERN.
Today is FOMC day, Bernanke's comments pro money printing or pro tapering will certainly determine the "character" of the current corrective pullback.
Lets review the potential EWP given the price information available at the moment.
It is a fact the undeniable corrective pattern unfolded from the May 22 high to the June 6 low (Assumed wave A). As well it is irrefutable that the current bounce is also corrective (Assumed wave B).
Therefore price should unfold one of the following patterns depending upon where the wave (B) tops:
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Zig Zag down if the wave (B) does not breach 1662 (Above it is less likely).
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A large Triangle would become more likely if the wave (B) reaches the 0.786 retracement.
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Above the upper Bollinger Band price could be forming either the Triangle option or a Flat.
Going forward if the 20 dma, previous resistance is transformed into support then the Triangle / Flat options will become the frontrunner options.
Objectively, at the moment the wave (B) of the Zig Zag options has the better chances of being the correct one. So far we can make the case that price is unfolding a DZZ with a potential Ending Diagonal wave (Y). The 1 x 1 target is at 1659.
Lets now analyse the most likely consequence on the advance from the November low depending on which pattern is the correct one:
- Zig Zag ==> The Advance from the November low is over The assumed wave (C) down should bottom no lower than the trend line support from the October 2011 low (Preferred target box = 1555 - 1515). The intermediate up trend should resume afterwards.
- Triangle ===> The Advance from the November low will be concluded with a thrust following a large Triangle (We are now in the wave b). Once the EWP is over a multi-week pullback should not breach the 200 dma.
- Ending Diagonal ===> At the moment this option has the lowest probability of being the correct one, but if price maintain a sequence of higher lows/highs and the 20 dma is not breached again it could pan out.
Since the most likely outcome is not clear we have to watch clues from momentum and breadth indicators.
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MACD bullish signal cross or failure.
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RSI above or below the 50 line.
- McClellan Oscillator: it seems that a breadth thrust from the extremely oversold reading reached on June 5 could have been trigger. Going forward the Zero line is the line in the sand for the Bulls vs Bears fight.
Today I will monitor closely two sectors that could have formed either a bullish or bearish Triangle. Obviously both patterns cannot be right:
- XLF: If the gap at 19.98 is not closed price could be on the verge of concluding a bearish Triangle wave (B).
(I posted this chart on Twitter/Stocktwits yesterday afternoon; is not updated)
- IWM: A bullish Triangle could have been concluded on June 14. Hence price is now unfolding an impulsive wave (C) up. Price could be now unfolding a wave (IV) provided it does not overlap below 98.855.
