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Weekly Technical Analysis


The month of June ended with a Doji candlestick, with price recovering from a drop below 1576 (Former resistance now support). It can be considered a noteworthy achievement of the bulls given the previous monthly Shooting Star, and it should be regarded as an attempt to prevent a deeper correction from the May 22 peak.

If my preferred long-term count is correct price is now involved in the final stages of the "bearish" wave (X). Once the corrective phase from the May 22 high is concluded price will begin the "last" up leg that should complete the advance from the March 2009 low.

As I have discussed a tons of times, in my opinion, from the November 2008 low price is unfolding a Triple Zig Zag and if the massive bearish rising wedge is not declared untrue going forward we will have defined targets given by the converging trend lines both above (Once the correction is over) and below (If the price is involved in a larger downward correction). Next month the upper trend line will stand at 1712 +/- while the lower one is located at 1506 +/-.

It is essential to remind that if the wedge pans out it will be followed by a sharp decline that could retrace back to the level where it began, that is to say the March 2009 low.

SPX Monthly Chart
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Therefore if the Triple Zig Zag count is correct, the current pullback will establish the wave (B), which will be followed by the last multi-month wave (Z) up.

SPX Weekly Chart
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In my last weekly update I was considering the range 1542-1508 as the potential target of the assumed downward correction. Last Thursday I adjusted the target box to the range 1536 - Trend line from the October 2011 (This week it stands at 1490), preponderating the lower range since at 1508 we have the 0.618 retracement of the assumed wave (A) from the December 31 low, it is the 1.618 extension target if price is unfolding a larger Zig Zag down and it is where the 200 dma is now standing.

SPX Daily From December Chart
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However since the impressive recovery form the June 24 low usually should not be just a one legged affair, and the short-term EWP suggests at least a 3-wave up leg, in which case depending upon the size of the assumed pending second leg up the downward correction can morph into a larger sideways one.

At the moment there is not a rule that can differentiate one pattern from the other, ideally, if price has more business to the down side bulls should not reclaim the broken trend line support, now resistance, from the November 16 low, actually a reversal at the gap located at 1629 would be right spot for the resumption of the down trend.

But I prefer to give a larger safety margin establishing the line in the sand at the lower high located at 1654.

In the weekly chart we also have a doji, which is suggesting the likelihood of more follow-through to the upside for next week.

Here the demarcation is clear: A weekly close above the 10 wma, in conjunction with the close of the daily gap at 1629 should allow to extend the recovery rally towards the 1654 resistance area while a weekly close below the 20 wma will open the door to a drop towards the next major support located at 1536.

In my opinion if bulls achieve to reclaim the 10 wma the probability of a larger down move will decrease.

SPX Weekly Chart 2
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Last Friday I suggested to remain open-minded to different "ideas" since the improvement seen in the breadth indicators could morph the initially thought more likely deeper correction into a sideways larger move that could shape a Triangle, in which case the June 24 lod would be the low point of the corrective pattern.

The breadth thrust as well as the positive divergence of the McClellan Oscillator is a good start.

NYSE McClellan Oscillator Chart
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However it is not "all roses and sunshine" for the bulls since weekly momentum remains aligned with the scenario of a deeper correction since we have the bearish cross of the MACD and no sign of deceleration in the Stochastic down trend. In order to see an improvement the weekly RSI has to break above the trend line resistance from the May 17 high.

SPX Weekly Momentum Chart
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The daily RSI holds the key since in order to expect a larger rebound from the June 24 low, the RSI has to break above the trend line resistance from the May 21 high and recover above the 50 line.

SPX Momentum Chart
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Regarding the shorter time frame scenario I maintain the scenario of a Zig Zag from the June 24 low as long as the gap at 1588 is not closed. Therefore the current assumed wave (B) pullback could unfold either a Double Zig Zag (1x1 target at 1596) or a Triangle. Take notice that if the wave (B) bottoms at 1596 the equality extension target for the following wave (C) up is located at 1656 in which case the Triangle option could pan out.

SPX 15-Minute Chart
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  • The pattern from the May 22 high is corrective therefore once it is completed price will resume the intermediate uptrend, probably it will be the last up leg of the "bearish" wave (X).

  • So far price has unfolded a 3-wave down leg followed by an aggressive rebound (In my opinion the internal structure is not impulsive therefore I rule out that price has concluded the corrective pattern).

  • If the gap located at 1588.03 is not closed I expect a Zig Zag up structure (abc) from the June 24 low.

  • The size of the assumed pending wave (C) up will determine if price will unfold a larger downward correction or a larger sideways one (Maybe forming a Triangle).

  • Therefore at the moment I can establish two scenarios and three potential EW counts depending upon where the assumed Zig Zag up establishes the top:

  1. Downward correction:
  • If the top is located in the range of the 50 dma (1622) - gap fill (1629) ===> Blue count (Double Zig Zag), in which case price is now unfolding the wave (X). Once the wave (X) is in place price will unfold the last Zig Zag down.

  • If the top is located in the range 1629 (The gap is closed) - 1654 ===> Red count (Zig Zag or larger Double Zig Zag), in which case price is now unfolding the wave (B) or the wave (X). The following down leg will be the wave (C), ending the correction, or the wave (A) of the second Zig Zag.

  1. Sideways correction (Probably a Triangle): If bulls are able to extend the "oversold" bounce above 1654 (Lower high of the 3-wave down leg from the May 22 high). If this is the case price could be unfolding the wave (B) of a Triangle with a potential target at the upper Bollinger Band = 1661.

SPX Daily Chart
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Since recently SPX is almost 100% correlated with the movement of long term yields I suggest to closely monitor TLT.

Here I am expecting an oversold rebound (Not a major bottom).

The first target is located at the trend line resistance from the May 1 where we also have a gap that can be filled at 112.11.

The second target is located in the range of the 0.382 retracement and a gap = 115.22.

Obviously as long as TLT continues the rebound SPX should follow it.

TLT Daily Chart
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Next week we should have a bullish seasonality until Wednesday. On Thursday the US markets are closed. On Friday we have NFP, it will be interesting o see if a "bad" number continues to be considered bullish for the bond and equity markets while a "good" number is bearish.


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