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SPX: Weekly Technical and Elliott Wave Analysis

IMPASSE

Impasse is defined as a situation in which no progress can be made.

This week SPX has made two unsuccessful attempts to achieve a new ATH. This failure, even though should not be considered as a bearish sign, it comes with two stretched breadth indicators the McClellan Oscillator and the 10 dma of the NYSE Adv-Dec Volume.

This negative issue does not necessarily mean that price has established a top but it should prevent a large move to the upside if price finally achieves to break through the January peak in addition probably negative divergences will de displayed.

  • 10 dma NYSE Adv-Dec Volume:

NYSE Advance-Decline Volume versus SPX Chart

  • McClellan Oscillator:

NYSE McClellan Oscillator Daily Chart

Even though a pullback is a possible scenario I rule out a meaningful correction for the following technical reasons:

  1. The NYSE Adv-Dec Line last week has established a new ATH. We can see that from the August low it is maintaining the bullish trend intact with higher highs - higher lows. Usually a major top should be established with a negative divergence.

NYSE Advance-Decline Volume versus SPX Daily Chart

The RSI (5) is overbought and displaying a negative divergence but as long as this breadth indicator remains above its 10 dma and the RSI (5) does not drop below the 50 line it will not issue a sell signal.

NYSE Advance-Decline Volume versus SPX Daily Chart 2

  1. The 10 dma of CPCE should drop at least below 0.55 in order to enter the complacency zone.

CBOE Options Equity Put/Call Ratio Chart

  1. The 10 dma NYSE ARMS Index should drop below 0.875 in order to have an overbought condition that could open the door to a meaningful correction.

NYSE ARMS Index Daily Chart

In addition I will be monitoring the weekly Stochastic of the NYSE Summation Index, which surprisingly has recycled back up issuing a new bullish cross without entering the oversold zone. Going forward the next sell signal should occur once the Stochastic has entered the overbought zone.

NYSE Summation Index Weekly Chart

Another bearish signal will be given when retail Investors are all in (Usually they are the last bag holders).

AAII Bull Ratio Chart

How much higher can SPX go? In other words where it will complete the corrective rally from the March 2009 low?

Even though there is a belief that the equity market will never go down again at some point I am 100% certain that eventually a bear market will come and price will drop to at least a Fibonacci retracement (0.382 - 0-5 - 0.618) of the entire advance.

Since no one can foretell future events we need to see clear observable evidence that price is ready to establish a turning point. At this right moment in my opinion this evidence is missing.

Elliot Wave wise we can make the case that price is unfolding a Double Zig Zag, and probably we are in the late stages of the last wave (Y) hence if we take the extension targets into consideration the wave (Y) should top in the range 1936 - 2171.

In the monthly chart below we can establish as potential pivot reversal the 10 mma, which stands at 1727 (A breach of this moving average could open the door to a major decline if the 5 mma crosses below the 10 mma), therefore bulls do not have a large cushion to protect themselves against hardship.

With 5 trading day's left to end the month of February so far the two candlesticks following the December peak are suggesting that the probability favors a continuation pattern (A move to a new ATH) rather than a break down of the critical support.

SPX Monthly Chart
Larger Image

But if a likely negative diverge of the monthly RSI is not erased it will cast serious doubts regarding the sustainability of a new up leg.

The loss of the RSI trend line in force from the February 2009 low and a bearish cross of the MACD would constitute observable evidence of a potential Major Top.

SPX Monthly Momentum Chart
Larger Image

Following the Elliott Wave count of a Double Zig Zag, which is not a rocket science ad can be subjective, since the up leg off the October low has unfolded a 3-wave up leg, maybe price will complete the assumed wave (Y) with an Ending Diagonal, in which case we are now in the wave (III). If the equality extension target with the assumed wave (1) is fulfilled the Ending Diagonal wave (5) would top at 1910.

SPX Weekly Double Zig Zag Chart
Larger Image

Lets go back to the observable evidences.

SPX ended the week in a mixed tone with a Doji print. If next week the 10 wma is breached we have two potential targets: the 5 wma at 1809 and the 20 wma at 1797.

In my opinion given the internal structure it is more probable that former support will hold. While if the 20 wma were breached then price will most likely revisit the February 5 low.

SPX Weekly Zoom Chart
Larger Image

In the daily time frame we have more precise price levels.

  • Above the January peak the upper Bollinger Band at 1860.
  • Below Thursday's lod at 1824.58 the range 1815 - 1813 (50 dma) and 1799. 85 (Gap that can be filled and the 20 dma).

Probably if the Elliott Wave pattern unfolded from the February 5 low is not completed yet the 10 d ma, which stands at 1824 should hold. If this were the case price would be involved in a sideways continuation pattern, maybe a Triangle.

SPX Daily Chart
Larger Image

Regarding the Elliott Wave count of the advance from the February 5 low, in my opinion so far price has unfolded a 3-wave up leg (Either the wave W of a Double Zig Zag or the wave A of a Zig Zag), therefore if 1824.58 holds the pattern should morph into a Double Zig Zag (Blue count) otherwise a deeper pullback wave (B) should bottom in the range 1808 - 1798, followed by a wave (C) unfolding the Zig Zag option (Red count) with an equality extension target in the range 1907-1918 (Assumed wave III of the Ending Diagonal option).

Since the pattern is corrective the Ending Diagonal idea discussed above could pan out.

If the gap at 1798.84 is closed and the 20 dma does not hold then probably price would be involved in a larger corrective pattern from the December peak.

SPX 60-Minute Chart
Larger Image

VIX on Friday printed a doji above the 200 dma. It seems probable a test of horizontal resistance located at 15.80.

If VIX moves above 15.80 the 20 dma = 16.40 and the gap fill at 17.09 would come into play sending SPX to the lower target range of 1808 - 1798.

VIX Daily Chart
Larger Image

In addition to VIX I will be monitoring:

  • NDX: The loss of the February 20 low could confirm a Double Top with a target at 3595. Any way as long as the 200 mma which stands at 3572 is not breached it would not endanger the up trend.

NDX 60-Minute Chart
Larger Image

  • XLF: If the 200 mma does not hold it seems probable that from the February 19 peak price is unfolding a Zig Zag down. The assumed wave (C) should bottom in the range 21.12 (0.5 Retracement) - 21.02 (Gap fill).

If this is the case from the February 3 low price should at least unfold a Zig Zag and the wave (C) would have an equality extension target in the range 22.26 - 22.36.

XLF 60-Minute Chart
Larger Image

 

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