In the weekly update of March 9 I have discussed that due to the internal corrective structure of both up legs from the October and February lows it seemed probable that price was forming an Ending Diagonal.
If the Ending Diagonal idea pans out it could complete a Double Zig Zag from the March 2009 low.
Is the Ending Diagonal done?
Tuesday's breakout failure could have completed the wave (V) but we will not have a confirmation as long as the current bounce, which is corrective, will establish a lower high. I doubt that the 50 dma will hold a fourth time another bout of selling.
There are plenty of supports that could deter a meaningful decline (The major ones are 1813.55 which is the last higher low and the rising 200 dma which today stands at 1786) but an Ending Diagonal is usually followed by a sharp decline retracing back to the origin of the pattern and if price has completed the Double Zig Zag from the 2009 lows then price would retrace much further.
Therefore we can see in the monthly chart that if the 10-month m.a. Is penetrated it could define the beginning of a bear market cycle. Probably price should retest the former breakout layer 1576 - 1553. If this support does not hold than it would lock in the advance from the 2009 low as a complete Elliott Wave pattern (Double Zig Zag) opening the door to a much larger decline with a potential target in the range of the 0.382 - 0.5 retracement.
Regarding the long-term Elliott Wave pattern, since the advance from the 2009 low is corrective maybe we could have two options:
- Price has completed the wave (I) of an Ending Diagonal
- Price has completed the wave (III) of an Ending Diagonal
So we have a possible ending pattern (pending confirmation of a lower high) but in addition breadth indicators are displaying negative divergences and sell signals.
- The McClellan Oscillator has its MACD with a bearish cross and it has lost the zero line
- The Summation Index has issued a sell signal by breaching its 10 dma
- The % of stocks above the 50 dma is displaying a negative divergence at the last SPX marginal higher high.
Regarding the short-term Elliott Wave pattern, the assumed wave (V) of the Ending Diagonal scenario should have been established with a Double Zig Zag. The last up leg has been a thrust following a Triangle wave (B).
Even if the first down leg is not impulsive it should not prevent a meaningful decline provided the current bounce establishes a lower high in the range 1882 - 1887.
Odds favour a lower high not only because the internal structure of the current bounce is clearly corrective but also because VIX should be on the verge of completing a bullish Falling Wedge.
