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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


If you are a reader of my site you already know that in my opinion the current pullback does not fit with "perma" bearish scenarios (Not yet), instead I expect a correction that should not violate the rising trend line support drawn from the October 2011 low (1500 area).

To put this in context with the long-term count, I maintain the DZZ count off the 2000 high, in which case from the November 2009 lows, price is unfolding the wave (X), with a TZZ, probably within a bearish rising wedge. If this is the case the current pullback should be the wave (B) of the third ZZ that should not breach the mentioned rising trend line from the October 2011 low. If this scenario is correct the wave (B) will be followed by the last wave (C) up that will conclude the overall pattern establishing a major top.

SPX Weekly Wedge Chart
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If the current pullback does not belong to a "major" reversal pattern it means the price will retrace a segment (Fibo retracement) of the advance from the November 16 low.

Keeping in mind that a corrective move can easily morph, to keep the analysis as simple as possible I see two options:

  1. Zig Zag down: If this is the case an impulsive or Ending Diagonal wave (C) has to bottom in the range 1535 - 200 dma (1506) or not lower that October 2011 trend line.

SPX Daily From November 16 Top In Chart
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  1. A complex correction could morph into a Double Zig Zag, in which case now we are in the wave (W). If this is the case the following pullback (Wave X) should be a large one but it should fade below the 50 dma. This pattern will have to maintain a sequence of lower highs/lower lows until the wave (Y) is in place.

SPX Daily From May Chart
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Going forward as long as down legs are impulsive and rebounds are corrective I will follow the first option (Zig Zag).

Therefore the current down leg (From last Thursday's lower peak) has to unfold either an impulsive sequence (5-wave down leg) or an Ending Diagonal. For the time being I will assume that the pattern is impulsive. With an impulsive wave (C) it is more likely that the bottom should be closer to the 1.618 extension = 1508 rather than the equality extension, which is located at 1563.

SPX 60-Minute Chart
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I can make the case that given that price has reached the area of the 20 wma = 1582 as well as we can count a complete impulsive down leg at yesterday's hod, a wave (2) rebound is likely.

In a strong downtrend a wave (2) bounce should top in the range of the 0.382-0.5 retracement. The following down leg (wave 3) should be larger than the wave (1) hence it could have a target in the range 1545 - 1537.

SPX 5-Minute Chart
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In the technical front we have to monitor the McClellan Oscillator since it can be considered oversold and in addition it is showing a positive divergence. If the impulsive wave (C) option is the correct one the pending wave (3) down should not maintain the positive divergence.

NYSE McClellan Oscillator Chart

Sector wise I will monitor XLF for two reasons:

  1. If my SPX scenario is correct, XLF must not fully retrace the advance from the April 18 low.
  1. So far the pattern from the May 22 is suggesting straightforward Zig Zag, with the wave (C) being the thrust following a Triangle. The equality extension target is located at 18.57 (3% below yesterday's eod print).

XLF 60-Minute Chart
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Regarding VIX. We can see in the weekly chart the VIX has breached an important trend line resistance in force since the April 2012 peak. The next resistance is located at the December 2012 high at 27.23 in the mean time the weekly stochastic is approaching the overbought line.

VIX Weekly Chart
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Barring a crash of the equity markets usually there should not be much follow-through to the upside after a daily 23 % jump. In addition with the daily candlestick well above the upper Bollinger Band and a negative divergence of the RSI, odds favour a retracement.

The trend from the May 17 low is clearly up as long as the trend line is not breached, but I would not rule out a large pullback if the BB buy equity signal were fulfilled.

VIX Daily Chart
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Today we have Quarterly OPEX.

Have a great weekend.


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