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TheWaveTrading

TheWaveTrading

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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Weekly Technical Analysis

I MAINTAIN UNCHANGED THE SCENARIO OF A PULLBACK

I have to admit that it has been a major mistake underestimating the strength of this "bull" market. The fact that the pattern from the March 2009 is clearly corrective has erroneously induced my analysis in expecting a major top and a reversal back towards the 2009 lows, above all knowing that the FED continues to pour in the market $85 billions each month. Eventually there will be a meaningful correction but probably it will not endanger the intermediate trend.

Therefore if we get rid of the bearish wave (X) scenario we could have to options:

  1. Rising Wedge: Price is involved in the late stages of the wave (C) of an Ending Diagonal Triangle. Once the wave (C) is in place a multi-year pullback wave (D) could bottom in the area of the 100 m ma which today stands at 1292. The following wave (E) up will complete the pattern.

SPX Monthly Wedge Chart
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  1. Ending Diagonal wave (C): Price is involved in the late stages of the wave (I) of an Ending Diagonal. The wave (II) could have the same target of the wave (D) of the Rising Wedge scenario.

SPX Monthly Enfing Diagonal Chart
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Monthly momentum indicators are overbought but the RSI is not displaying a negative divergence therefore as long as the trend line in force since the February 2009 low is not breached the intermediate trend remains up.

SPX Monthly Momentum Chart
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If we maintain valid that from the 2009 low price is unfolding a Double Zig Zag then from the October 2011 price is unfolding the second Zig Zag.

The next Fibonacci extension target is located at 1936.

The trend remains clearly up as long as the 3m ma holds. This moving average, which stands at 1749 almost, coincides with the 50 dma.

A meaningful correction or even a trend reversal could occur if the 10 m ma = 1649 is breached. The 10 m ma is standing slightly above the October 9 low; therefore this is the major pivot support.

SPX Monthly Chart
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If we zoom in to the time frame from the October 2011 low and we use moving averages as a gauge of the sustainability of the up trend, likewise we can deduce that the last up leg which began at the October 9 low will not be in danger of being reversed as long as the 5 m ma which today stands at 1713 is not breached.

SPX Monthly Zoom Chart
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If the EW count that I am following is correct the upcoming correction will be a shallow one since price should not breach (End of month print) the 3 m ma = 1749.

Regarding the long-term EW count, If on October 2001 price established the wave (X), in my last weekly update I have suggested two options:

  1. Double Zig Zag: If this is the case price is now unfolding the last wave (5) of (Y). Since the advance off the October low is clearly corrective the assumed wave (5) has to form an Ending Diagonal. The Equality extension target for the wave (5) is located at 1911.

SPX Weekly Double Zig Zag Chart
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  1. Triple Zig Zag: If this is the correct count, from the October low price is unfolding the last Zig Zag, hence we are now in the third wave (A). This option has an obvious caveat of lack of proportionality between the sequence of the (W) - (X) with the assumed (Y) - (X) which is too small.

SPX Weekly Triple Zg Zag Chart
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Since the advance from the October 9 low is clearly corrective one of the two options should pan out with either an Ending Diagonal (Double ZZ option; Blue label) or a Zig Zag (Triple Zig Zag option; Red label) at the same time If the corrective EW pattern from the October 9 low has been completed last Friday I expect a pullback with a target in the range of the 50 dma, which stands at 1742 and a gap that can be filled at 1733.15.

SPX Daily Chart
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We have several reasons that suggest the likelihood of a pullback, which will probably be sharp but short-lived. According to Sentimentrader the last 7 trading days of December have a bullish seasonality, which usually extends into at least the first week of January. Hence if a correction is in the cards it could last until December 19 +/-.

SPX December Seasonality Chart

Dates to watch during December:

  • December 5: ECB Meeting
  • December 6: NFP
  • December 18: FOMC
  • December 20: Quarterly OPEX

In addition to the seasonality, the weekly stochastic of the Summation Index is already approaching the oversold line hence it should prevent a meaningful decline. (Usually a new buy signal is issued once the Stochastic crosses the oversold line)

NYSE Summation Index Weekly Chart

If we look at the following weekly chart, it seems that I am talking nonsense if I were to expect a pullback that would breach the 10 w ma, which stands at 1753 in such a short period of time since the only potential bearish sign is a Spinning Top that has to be confirmed.

SPX Weekly Chart
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But in the daily chart below we can make the case that price has formed a bearish rising wedge. This pattern is a sign of bullish exhaustion. If the wedge pans out usually the following move should be a sharp drop towards its origin, hence the 50 dma, which stands at 1742, or even the gap at 1733.15 could come into play.

We don't know yet if the wedge is over, but last Friday was a classical reversal day as the opening gap was closed (Exhaustion gap?) + a Spinning Top candlestick.

Next week we need to see evidence of a reversal:

If the 10 d ma which stands at 1798 is breached and by the end of next week price confirms the weekly Spinning Top with and eow print below 1800.59 it should open the door to the short-term bearish scenario. Maybe during the pullback price could also form an H&S.

SPX Daily Wedge Chart
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Additional reasons for a pullback:

  • While SPX is establishing higher highs NYUD is establishing lower highs and on Friday it marked a negative reading.

NYSE Advance/Declne Volume Index Chart

  • Daily RSI has a triple negative divergence while the MACD has been virtually flat-lined since November 22, next week it can easily roll over issuing a sell signal.

SPX Daily Momentum Chart
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  • Hourly momentum both the RSI and the MACD are displaying a triple negative divergence since November 15, in addition the MACD last Friday has issued a sell signal.

SPX 60-Minute Momentum Chart
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  • CPCE below 0.5: This is a short term bearish contrarian indicator.

CBOE Options Equity Put/Call Ratio Daily Chart

Short-Term EWP

We can make the case that last Friday price with a shallow thrust following a Triangle has completed the Zig Zag from the October 9 low.

If price has completed the five-wave sequence of the wave (C) we need to see evidence of the reversal, which will be given by breaching of the trend line that connects the wave (2) with the wave (4).

SPX 60-Minute Chart
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