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SPX: Are We Almost Done With The Downside?

Before analysing the Elliott Wave pattern lets review some technical indicators because in my opinion we are getting close to extreme readings that usually should favour an oversold bounce and even the resumption of the intermediate up trend with one more and probably the last new ATH which should conclude the corrective rally from the 2009 lows.

  • CPCE is at an extreme high reading (Contrarian Indicator). Though this indicator is useful only for the immediate time frame (One day time frame).

CBOE Options Equity Put/Call Ratio Chart

  • NYSE Adv-Dec Volume is displaying a positive divergence suggesting accumulation during last Friday's SPX lower low.

NYSE Advance-Decline Volume Daily Chart

  • The McClellan Oscillator is approaching the oversold line we (We not quite there yet). During a correction phase the Oscillator should drop below the 60 line in order to consider viable a potential bottom. Once the oversold line is breached we could have two scenarios a breadth thrust and a bottom like it occurred in October and February or further SPX weakness while the Oscillator displays a positive divergence in the case of the bottoms of the end of June and August.

NYSE McClellan Oscillator Daily Chart

  • The weekly Stochastic (5,3,3) of the Summation Index has crossed the oversold line; hence the probability that it will recycle back up is increasing.

NYSE Summation Index Weekly Chart

  • The % of Stocks above the 50 dma has dropped almost to -2 standard deviation from the mean. A penetration of this level usually coincides with a market bottom. (We are close but not there yet)

S&P500 Stocks above 50dma Chart

  • The % of Stocks above the 10 dma can be considered enough oversold for SPX to bottom.

S&P500 Stocks above 10dma Chart

  • The 10 dma of the NYSE ARMS index is crossing above the 1.20-ish area where usually bulls capitulate.

NYSE Arms Index Daily Chart

  • The VIX/VXV ratio is spiking above 1.00. Typically longer-term volatility is at a premium relative to near dated volatility. When the ratio climbs above 1 it may be considered that short-term volatility is showing "excessive fear". Often this is a precursor of a market bottom.

VIX:VXV Daily Chart

  • The NYSE 10 d Adv-Dec volume has not reached the oversold line but so fat it is displaying a positive divergence.

NYSE Advance-Decline Volume Chart

Lets now have a look at the VIX chart. It looks probable that it has formed a bullish falling wedge, which truncated last Wednesday. If it were wedge I would not rule out a move above the last lower high established on March 14 at 18.22. But Friday's Spinning Top with the real body of the candlestick above the upper Bollinger Band could trigger a buy equity signal if VIX closes below the Bollinger Band. In my opinion in addition it should drop back below the upper converging trend line in which case we could consider that the wedge has failed.

VIX Daily Chart
Larger Image

Lets move on to the SPX charts.

Last week Shooting Star confirmed the failed-break out since the bottom of the trading range (March 14 low) did not hold and price plunged almost reaching the 27 wma, which stands at 1812. In this area price MUST establish a bottom in order not to endanger the intermediate up trend. The weekly candlestick per se is not inspiring a great confidence that the correction is over therefore next week bulls have to achieve a weekly Harami or a Piercing Line in order to attempt a "counter-attack".

SPX Weekly from June 2012 Chart
Larger Image

In the following daily chart we can see that after last week selling bears have inflicted serious technical damage with the loss of the 100 dma. If next week the1815 are does not hold there is only thin air until the gap fill at 1799.84 which also coincides with the 0.618 retracement of the advance from the February 5 low to the April 4 high.

If instead bulls reclaim the 100 dma it would be the first necessary step to attempt to recycle the pattern back up. The next big hurdle will be to reclaim the 50 dma.

SPX Daily Chart
Larger Image

Elliott Wave wise despite the bearish performance the internal structure of the selloff is corrective. So far we have a 3-wave down leg (Zig Zag; Blue labelling). In addition both the first and second down leg are corrective therefore we can rule out that price is involved in a major reversal pattern but we cannot exclude a larger correction (Double Zig Zag; Red labelling) if bulls fail to achieve a bottom, in which case the following rebound will most likely fail in the range 1839.57-1844.

If this is the correct short-term Elliott Wave pattern the larger Ending Diagonal idea will be invalidated and I will have to reassess the overall pattern.

Since the current down leg (assumed wave (C)) is not impulsive it MUST unfold an Ending Diagonal, therefore maybe we have two options:

  1. Last Friday with a small wedge price has concluded/almost concluded the wave (C). The following rebound will give us clues regarding if the correction is over or if price is unfolding a Double Zig Zag.

SPX 15-Minute Chart
Larger Image

  1. An Ending Diagonal wave (C) is under construction in which case the following rebound should fail below 1835.07.

SPX 2-Hour Chart
Larger Image

Next week I am on holiday. I will be back on April 21.

 

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