A Diverging Market
If all things were equal as we can see in the weekly chart of SPX below there would be no indication whatsoever of trouble ahead. The trend from the November 2012 low is clearly up. The three candlesticks following the March 7 peak (Reversal of Reversal of Reversal) are suggesting that without a lower low (Below 1839.57) odds favour that price is forming a continuation pattern.
However the US market is fractured since SPX, DOW, SMH, XLE, XLP and OIH have not established a lower low (XLE and OIH have established new highs) while we have seen serious weakness in IBB which has breached its February low, XLY and NDX, on Thursday they both reached the 0.618 retracement, while IWM has tested the 0.5 retracement. All these sectors have lost the 50 dma.
In the case of the weekly chart of NDX we can see that price has bounced off the 20 wma and the December peak. The weekly candlestick does not give much confidence that the decline is over. If this support does not hold there is not any substantial support that would deter a drop towards the February lows.
However the daily Stochastic and RSI (5) are oversold hence odds should favour a bounce.
If an oversold bounce is mustered it should not breach the range of the 50 dma - 10 dma, while if despite the oversold momentum indicators Thursday's lod does not hold then price could fill the gap at 3497.60 (Almost 7% drop from Friday's eod print). If this is the case SPX should not be able to maintain the sideways pattern.
SPX remains stuck in a trading range but there is a latent risk of a Double Top if the March 14 low at 1839.57 is breached.
So far within the trading range dips are bought and rips are sold (On Friday bulls failed to reclaim the 20 dma).
So we are faced with uncertainties but maybe an Elliott Wave analysis of the pattern so far developed could give us clues.
It is an unquestionable fact that the pattern is corrective therefore it should not endanger the intermediate up trend. The unresolved issue is if price will unfold a Zig Zag (Downward correction) or a Triangle (Sideways correction).
- Zig Zag option: A wave (C) down is underway from the March 21 peak. If this is the case we are now in initial stages of the wave (III) of (3). Probably the Double top target located at 1795 will be achieved.
Requirement: Maintain the impulsive sequence hence next Monday price MUST not breach Friday's hod at 1866.63 and in the next down leg price MUST establish a new lower low. If we are in the wave (III) of (3) it has to establish a bottom below the 1 x 1 extension target (Below 1833).
The bearish cross of the hourly 50 ma below the 200 ma is giving this option an edge.
This option will be busted if bulls are able to extend the rebound off last Thursday's lod above 1866.63.
- Triangle Option: If the Zig Zag option is busted then probably price is forming a bullish Triangle wave (B).
Breadth could spoil the Zig Zag option:
- The McClellan Oscillator since last Wednesday is displaying a positive divergence. It could be a unique issue that might have to do with month and quarter end but could prevent the Zig Zag option if it is a prolonged action with a thrust above the zero line.
- The NYSE Adv - Dec Line looks even more bullish as it has reclaimed the 10 dma interrupting the sequence of lower highs/lows from the peak reached on March 18.
Opting to remain on the sidelines until we see an end of the erratic sessions might be a sound decision.