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SPX: Weekly Technical Analysis

From the November 2012 low, fourth time, the 27-week ma has acted as support preventing a larger decline.

As well the weekly hammer with the low of the tail at the 0.5 retracement of the advance from the October low is suggesting that at least the corrective down leg from the December 31 peak is over.

Even though it is premature to conclude that the correction is over (price could still be unfolding a Zig Zag hence this advance would be the wave B which will establish a lower high), if bulls are able to overcome the hurdle located in the range 1813.50-1815.55 then odds would favour the resumption of the intermediate up trend.

SPX Weekly Chart
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We have several bullish "signs" that are suggesting that price has established a new swing low:

  • Last week the SPX % of stocks trading above the 50 dma dropped to an oversold level where a bottom can be established.

SPX Percent of Stocks Aboce 50-DMA Chart

  • 10 dma of the NYSE Adv-Dec Volume also dropped to the oversold line where usually a bottom can be established.

NYSE Advance/Decline Volume Chart

  • Breadth thrust of the McClellan Oscillator which reached an oversold reading and was displaying a positive divergence of its MACD histogram as well as a positive divergence of the Oscillator last Tuesday when SPX made an intraday lower low. Going forward if the McClellan Oscillator remains above the zero line it will favour the bulls.

NYSE McClellan Oscillator Daily Chart

  • The NYSE Advance-Decline Line has issued a bullish cross.

NYSE Advance-Decline Line Daily Chart

  • VIX has fallen sharply (Weekly Shooting Star). As we can see in the weekly chart below this is the fourth time since December 2012 that a spike above the 200 wma has been followed by a fierce collapse below the 20 wma while the 15.80 area has acted as support/resistance. Therefore if SPX has established a new swing low we need to see VIX falling below the 20 wma which today stands at 14.22

VIX Weekly Chart
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  • VIX term structure in contango with spot below near term future contracts is suggesting a lower volatility environment.

VIX Term Structure Chart

So we have bottom signals but no guarantee yet that the up trend has resumed.

As a matter of fact weekly momentum remains a major concern:

  • RSI displayed a negative divergence at the SPX December 31 high and it has lost a major trend line support.
  • The Stochastic has lost the 80 line but is has not entered yet the oversold zone.
  • The MACD on January 24 has rolled down issuing a sell signal.

SPX Weekly Momentum Chart
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And the weekly Stochastic of the Summation Index after issuing a sell signal in January, it has not reached yet the oversold zone where usually it recycles back up.

NYSE Summation Index Weekly Chart

Since we are still faced with uncertainties I will adopt a day-by-day strategy.

If the assumption that price has concluded a corrective down leg off the December 31 peak is correct (Double Zig Zag) it is reasonable to expect at least a 3-wave up leg from the February 5 low therefore eventually we should see a pullback followed by another up leg:

SPX 60-Minute Double Zig Zag Chart
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If the first up leg has ended at Friday's hod and the following corrective pullback finds a bottom in the range 1777 - 1768 then we would have the best bullish scenario with a potential Inverted Head & Shoulder. If this pattern pans out the theoretical target is located at 1859 (New ATH)

SPX 60-Minute Chart
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If instead next Monday we have more follow through to the upside this up leg should top in the range 1811 (200 hma) - 1815. 50 (Horizontal resistance)

The high reading of CPCE may favour it.

CBOE Options Equity Put/Call Ratio Daily Chart

Once this up leg is in place if the following pullback is corrective it will give us clues regarding the scenario of the new "Swing low" since given the size of the first up leg it would be reasonable to expect a new ATH with the assumed second up leg.

60 min. momentum is stretched (The absence of negative divergence of the RSI is suggesting that odds favour the scenario of at least a 3-wave up leg).

SPX 60-Minute Momentum Chart
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In the daily chart we can see that price has retraced 50% of the corrective decline from the December 31 high. In order to increase the odds that correction is over Friday's gap at 1773.43 must not be closed and bulls must overcome the 50 dma, which stands at 1809.

SPX Daily Chart
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Lastly but not less important we will have to monitor USDJPY since a weak Yen has been one of the main drivers of higher stock markets. Even if the down leg from the January 2 high is corrective as long as this pair does not recover above 103.64 the risk is tilted to the down side. If the correlation is maintained another down leg of this pair will most likely kill the SPX bullish scenario.

USD/JPY Daily Chart
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