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SPX: Follow Up of the Short Term EWP


At this right moment in my opinion the Ending Diagonal option that I have been discussing since the middle of September remains my preferred pattern (As long as price does not deny it).

If this scenario is correct price is now involved in establishing the top of the wave (III). I am saying involved because we need a "confident" lower high in order to consider a short-term top.

If the Ending Diagonal pans out, this pattern should conclude the Double Zig Zag from the 2009 lows.

If the current up leg (Off the October 9 low) extends above 1765 +/- this scenario will be most likely invalidated.

If this up leg is confirmed to be the assumed wave (III) the following pullback wave (IV) will be quite large. It is required a drop below the peak of the wave (I) which is located at 1709.67, hence probably it should bottom somewhere between the 0.382 retracement (If the wave III is in place = 1689.62) and the rising 50 d ma which today stands at 1686.

SPX Daily Ending Diagonal Chart
Larger Image

I am quite confident that the up leg off the October 9 should be the wave (III) because in my opinion it cannot be considered impulsive.

I have been discussing on Twitter/Stocktwits that my preferred count is a Triple Zig Zag, but the truncated wave (Z) objectively is a bit doubtful, hence despite price has a sequence of lower highs/lows bears need to finish off the possible reversal pattern by breaching the 1740 pivot support.

SPX 60-Minute Chart
Larger Image

Therefore although the s/t pattern is biased to the bearish side but it is not confirmed yet, bulls may be able to extend the inevitable correction into next week with a "holding pattern" for only one reason. Next Wednesday we have the FOMC meeting. Even though obviously no one in this planet is expecting a change of the current policy, and Mr Bernanke has lost his credibility, usually the equity market is not expected to kick off a correction ahead of a FOMC day.

If this is the case I can only think of a Triangle:

SPX 15-Minute Chart
Larger Image

Since I am short (Long SPXU; I have done two purchases on Friday and yesterday), today I will have to evaluate depending upon the price action, the need of at least reducing to half my short exposure.

In the technical front I am monitoring the McClellan Oscillator since despite it has declined a bit the histogram of the MACD has not displayed a negative divergence at the last peak hence maybe we don't have yet a breadth reversal.

NYSE McClellan Oscillator Daily Chart

In addition I am also watching the short term pattern of VIX, which honestly, at the moment is not displaying a clear reversal pattern and yesterday's gap close is not suggesting that it is ready to establish another higher high. If this is the case maybe a Double Bottom could be in the cards in which case SPX would not have yet the up leg off the October 9 low.

VIX 60-Minute Chart
Larger Image

Also I am keeping a close eye to the EURUSD (It is maintaining a large positive correlation with equity).

Here In my opinion price is in the late stages of the wave (Y) of a Double Zig Zag off the July lows. If this pattern were correct, price would be on the verge to kick off a correction that should aim at least at the trend line off the July low, more or less at 1.3430.

Have a great weekend.


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