I have been discussing that due to the fact that both up legs from the October and February lows are corrective there is a chance that price could be forming an Ending Diagonal.
If the Ending Diagonal idea pans out it could complete a Double Zig Zag from the March 2009 low. Once the 10-mma is breached it would open the door to a Major Reversal. If this were the case I would expect at least a retest of the October 2007-March 2000 highs.
If the monthly RSI negative divergence is not erased we will have the confirmation of a major top when:
- The RSI breaches the trend line support in force since the February 2009 low
- The Stochastic loses the 80 line
- The MACD rolls over (Bearish Cross)
Even though the two corrective up legs from the October low are suggesting that an Ending Diagonal could be developing two requirements must be fulfilled:
- The assumed wave (III) must top below 1940.89
- The following wave (IV) has to unfold a corrective pullback which has to overlap the wave (I) peak at 1849.44 and continue a deeper retracement below the 50 dma, ideally it should bottom in the range 1815 - 1802
While the first requirement is probable the second one is unknown and it will need a catalyst.
Major Reason for a pending top:
- The RSI of the NYSE Summation Index has remained overbought for quite an extended period of time, hence the probability of buying exhaustion is increasing.
- But the weekly Stochastic has not rolled down yet issuing a sell signal hence we don't have the confirmation that the up leg from the February 5 low is done.
More Compelling Reasons:
- The McClellan Oscillator is displaying an important negative divergence (it has peaked on February 18 while SPX has continued to establish higher highs). As long as it remains above the zero line bulls will maintain the upperhand, but the histograms has already crossed the zero line flashing a red flag.
- The 10 dma of the NYSE Adv-Dec Volume after surpassing the Overbought line on February 18 it is also displaying a negative divergence.
Both breadth indicators are suggesting that bulls no longer have the buying pressure needed to extend price much higher.
In the following daily chart we could make the case that price from the February 5 low is forming a bearish rising wedge, maybe this is the argument that could allow a deep retracement, since usually when a wedge is completed the following move in the opposite direction is usually sharp, but there is no guarantee of a large retracement with so many potential supports where dip buyers can step in and abort the assumed wave (IV) of the Ending Diagonal Project. (I can list at least 6 support layers starting with the 10 dma, which stands at 1860 and ending with the 50 dma which stands at 1827).
The three consecutive toppish candlesticks are suggesting that bulls are losing upside momentum.
Regarding the Elliott Wave count of the advance form the February 5 low you can easily see that price has displayed a difficult pattern to correctly interpret. In my opinion a Triple Zig Zag is a good option but I believe that there is no evidence of a reversal yet (First indication of a potential top if price loses the 1868 area).
As a matter of fact IWM is displaying a potential bullish flag, which is suggesting that price has one more pending up leg, which should conclude a Double Zig Zag from the February 5 low. It would be odd to see IWM rallying and SPX tanking.
Therefore maybe SPX, if 1872.92 were not breached, it could be forming an Ending Diagonal.
In the same way NDX, although pending just one more up leg, could also conclude the advance from the February 5 low with a rising wedge.
Lastly I wanted to show you the daily chart of VIX since despite the fact that there is no clear reversal pattern yet (As long as it remains below the 200 dma = 14.68) the Bollinger Bands are getting tighter which usually is a sign that a large move is coming.