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Weekly Technical Analysis

I EXPECT A LARGER CORRECTION

In my last weekly update I have changed my view regarding the "big picture". Despite the pattern unfolded by price from the 2009 lows is clearly corrective the probability of a bearish outcome that implies a move back towards the March 2009 low is at the moment slim.

Eventually there will be a meaningful correction but probably it will not endanger the intermediate up trend.

I maintain the idea that from the March 2009 low price is unfolding a corrective advance, probably a Double Zig Zag. If this is the case the next theoretical extension target is located at 1936.

In order to consider that the assumed Double Zig Zag is over bears have to breach the 10 m ma which today stands at 1674. I establish the October low at 1646.47 as the intermediate pivot support.

SPX Monthly Chart
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In addition to the monthly pivot support, monthly momentum will have to confirm the intermediate reversal once the RSI breaks the trend line support in force since the 2009 low and the MACD rolls over issuing a sell signal.

Therefore in order to consider that the EWP from the March 2009 low is over we need to see the following:

  • RSI breaks the trend line resistance

  • Stochastic loss of the 80 line

  • MACD rolls over

Notice that the RSI is not displaying a negative divergence hence odds are not supportive yet of a major decline.

SPX Monthly Momentum Chart
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Regarding the long-term EWP I can only guess two potential scenarios:

  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 1300. 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 Ending Diagonal Chart
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Lets go back to the advance from the March 2009 low.

If price is unfolding a Double Zig Zag it is probable that the wave (W) was completed at the February 2011 and the following pullback established the wave (X) at the October 2011 low. This is the easy portion of the pattern. From the October 2011 low the count can be arbitrary and not exempt of erroneous interpretations but in my opinion we could make the case that price is now involved in unfolding the last wave (5) of (Y), which began at the October 9 low.

If price achieves the equality extension target with the assumed wave (1) the wave (5) could top at 1910.

SPX Weekly Double Zig Zag Chart
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There is an issue with this EW count. Since the advance off the October 9 low has unfolded a clear 3-wave up leg, this pattern can only result in an Ending Diagonal. If the Ending Diagonal pans out it will open the door to a meaningful trend reversal.

SPX Daily Ending Diagonal Chart
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So if price is now unfolding the assumed wave (II) of the Ending Diagonal idea the pattern must be corrective and price has to bottom above the October 9 low.

If we look at the following weekly chart we can draw the following conclusions:

  • The bearish cross of the 3 w ma below the 5 w ma should imply a larger correction.

  • The weekly candlestick is suggesting that the pattern of the current pullback is not over.

  • On Friday price has stabilized at the first level of support located at the 10 wma.

  • If the 10 wma is breached the next target (T 1) is located at 1746.

  • If this horizontal support is also breached the next target (T 2) is located in the area of 1729 (Which coincides +/- with the rising 20 wma)

If the current pullback belongs to the assumed wave (II) of the Ending Diagonal it should bottom closer to T 2 rather than at T 1.

SPX Weekly Chart
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The daily chart gives further valuable information:

  • From the October 9 low price completed the 3 -wave up leg with a rising wedge (It is not an Ending Diagonal)

  • Usually/often a wedge is retraced to its origin hence the T 1 = 1746 should come into play.

  • 1746 is also the theoretical target of the Double Top.

  • The first test that will validate or abort the Ending Diagonal idea will depend upon the loss of the important support located at the 50 dma = 1762

  • If T 1 does not hold we can establish as T 2 the range 1733 (Gap that can be filled) - 1721 (100 d ma)

For the short-term time frame since price is attempting to stabilize at the horizontal support located at 1772, any rebound attempt in order to maintain viable the s/t trend reversal must stall below the 20 dma = 1795.

SPX Daily Chart
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Short-Term EWP:

If my scenario is correct price has to unfold a corrective pattern. To keep it simple price should unfold either a Zig Zag or a Double Zig Zag / Triple Zig Zag.

The wave (C) of a Zig Zag or the wave (W) of a Double Zig Zag has to be impulsive or it must form an Ending Diagonal.

So far from the November 29 high we have a clear 3 -wave down leg. Since in my opinion we don't have yet the extremes that usually lead to the end of a correction I expect further weakness ahead.

But for the immediate time frame the sideways pattern that price has formed since last Thursday lod is ambiguous since it could be a continuation pattern (Triangle or Wedge) or it could have established a base for an oversold bounce that will be confirmed if price recovers above 1782.56 in which case I don't expect a move above the 1791 - 1793 resistance layer (Or at the most the 20 dma = 1795 should refrain the rebound from moving higher).

In addition to the ambiguous short-term pattern next Wednesday we have a major risk event (FOMC meeting). All things being equal usually the equity market has a tendency to rebound ahead of the FOMC.

SPX 60-Minute Chart
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Moreover some metrics such as the daily stochastic are quite oversold already and the RSI (5) is displaying a positive divergence hence odds are not favouring further follow-through to the down side ahead of the FOMC meeting.

SPX Daily Momentum Chart
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Also hourly momentum with the positive divergence of the RSI and the bullish cross of the MACD are favouring a bounce attempt.

SPX Hourly Momentum Chart
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Friday's high reading of CPCE is also suggesting a bounce attempt for next Monday.

CBOE Options Equity Put/Call Ratio Index Daily Chart

If next Monday price confirms the basing scenario then the rebound should be either the wave (2) of (C) of the Zig Zag option or the wave (X) of the Double Zig Zag option.

If instead the sideways move is a continuation pattern then probably the next down leg should not open the door to a substantial move to the down side and it will probably complete the wave (I) of an Ending Diagonal wave (C) of the Zig Zag option.

Two potential continuation patterns:

  1. Ending Diagonal:

SPX 15-Minute Ending Diagonal Chart
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  1. Triangle:

SPX 15-Minute Triangle Chart
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Both patterns, if completed next Monday, would most likely result in an interesting R/R long set up ahead of the FOMC (Not suitable for large positions).

Obviously next Wednesday at 20:00 (CET) it is advisable to watch the initial swings from the fence.

The reaction of EUR/USD and bonds will dictate over the next directional move of equity, although theoretically once the FOMC is out of the way market conditions (Christmas holiday) are not conducive of a major trend generation.

In the technical front among the many indicators that I follow I will pay close attention in the weeks ahead to 3 indexes:

  1. Weekly Stochastic of the Summation Index: It is already oversold. It can remain oversold for an extended period of time but once a bullish cross is visible the correction will most likely be over.

NYSE Summation Index Weekly Chart

  1. 10 d ma of NYUD: Odds of a bottom will increase once the 10 d ma approaches the oversold line:

SPX Monthly Chart
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  1. A spike above 1 of the ratio VIX (1 month VIX futures) / VXV (3 months VIX futures) will substantially increase the odds of a bottom:

VIX:VXV Daily Chart

 

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