WAITING FOR EVIDENCES OF A BOTTOM
Three major assumptions:
Preferred long-term count: From the 2009 lows price is unfolding a corrective pattern, probably a Double Zig Zag.
Due to the negative divergences of weekly momentum and breadth indicators the probability that price is involved in the late stages is rising.
From the September 29 high price has not declined in an impulsive manner, therefore odds favour a corrective pattern that should not endanger the weakened intermediate up trend. But I have to establish the line in the sand, which in my opinion is at 1660.
At 1661.50 we have the 100 dma, which so far has prevented "bad things" to happen.
In addition if the suggested ending pattern of the entire advance off the 2009 lows is an Ending Diagonal the loss of the 100 dma will most likely kill this scenario.
Almost always the bottom of a prolonged down leg is established with a washout sell off, when bulls capitulate. Usually we should see a spike of TRIN above 2 or TICK below -1000, in other words a selling climax. In addition a reversal candlestick pattern would help to increase the confidence that the awaited bottom is in place.
I maintain a bullish biased outcome but so far there is no clear ending pattern in sight and with yesterday's eod print below the 50 dma bears clearly remain in control. Hence we need to see evidence in order to consider feasible the reversal of the short term trend which remains down.
Regarding the short-term EWP I am "working" with a potential TZZ, therefore if this count is correct from the October 1 peak price has to unfold a Zig Zag down in which case now we are in the final wave (C).
The wave (C) has to unfold an impulsive decline or form an Ending Diagonal hence, barring a surprise bottom; price is now in the wave (ii) of an impulsive down leg or an Ending Diagonal.
As we can see in the 60 min chart below the 50 ma is dangerously approaching the 200 ma. It is mandatory not to have a bearish signal cross otherwise the prospect of a new ATH will be seriously damaged.
So far we have a bearish 60 min chart as long as bulls do not reclaim the 50 ma.
The confirmation of a reversal will occur if the gap at 1693.87 is closed.
Yesterday's afternoon I posted on Stocktwits/Twitter the option of an Ending Diagonal wave (C), it could pan out with a larger bounce and an eod print below the 200 ma.
The 60 min chart of ES Globex is also suggesting that price has not concluded yet the corrective decline from the September 19 high. Here my preferred count is a Double Zig Zag, which is missing the last wave (Y). (Below I show you the chart I posted at the eod on Stocktwits/Twitter)
In the technical front the picture remains bearish but as the indicators are entering oversold territory we have to remain open minded and wait for evidence that price is bottoming.
- The McClellan Oscillator as expected it has dropped below the Bollinger Band with a slight positive divergence of the RSI (5).
- Daily Momentum indicators are flashing a serious warning with the MACD signal cross and the loss of the 50 line by the RSI (14). Usually exhaustion occurs with both the Stochastic and the RSI (5) cross their oversold line.
- Since we already have two key swing trading indicators with a sell signal (daily MACD and BPI) bulls do not want to see a bearish "trio" if the Summation Index joins with a bearish signal cross. As you can see in the chart below there is not much room left to the down side. (This is why bulls badly need a breadth thrust of the McClellan Oscillator)
VIX has established a higher high (Above the August 30 peak). Equity bulls might be "salivating" with yesterday's Shooting Star, but usually the absence of negative divergence subtracts credibility to the potential reversal candlestick.
Anyway we have to be aware that often a buy equity signal is triggered when VIX closes above the BB followed the next day by an eod print below it.
Lastly a look at the SPX weekly chart:
So far we have a weekly Doji (Indecision) that can morph into a bullish Hammer or a bearish Inverted Hammer.
Bulls must be aware of the importance of the 10 wma, which stands at 1678. An eow print below it would suggest a likely move next week to the critical (line in the sand) 20 wma = 1661.
Have a great weekend.