The rally from the 2009 low is aged; eventually it will end opening the door to at least a retracement. So far there is no indication that a top is in place, the doubtful one is IWM.
A new bear cycle will begin with a monthly close below the 10 mma.
Lets review the monthly charts of the major US indices to see where is located the line in the sand:
- SPX: The rising 10 mma today stands at 1805. Once it is breached we could expect a retracement to the support layer located in the range 1576 - 1553
- DOW: The rising 10 mma today stands at 15987. From the October 2011 it could be forming a rising wedge. If there is no ending pattern in sight (I think there is one) the next resistance is located at the trend line above 17000. Once the 10 mma is breached we could expect a test of the 2007 high located at 14198.
- NDX: The today stands at 3049.70;the next resistance is located at 3750. Once the10 mma is breached I have no idea of the potential target.
- XLF: The rising 10 mma today stands at 21.25 If the March high at 22.65 is breached the next resistance is located at 23.09; Once the 10 mma is lost we could expect a test of the horizontal support located at 17.12.
- IWM: The rising 10 mma today stands at 111.63; this week it has been reclaimed. It could have formed a rising wedge. If a top is not already in place, the next target is located at the converging trend line; once the 10 mma is lost we could expect a test of the horizontal support located at 86.81.
Among the mentioned indices IWM is the only one that could have already established a top. The rebound from the May 15 low is probably not over yet but it is corrective, hence until proven otherwise is should be considered a countertrend move that will establish a lower high. On Friday, despite the hammer candlestick it has failed to reclaim the 50 dma.
If a larger pullback is underway we have the gap at 111.96 and the 200 dma at 111.24 as a potential target from where another up leg could aim at the resistance zone located in the range 115 - 115.55.
In the following weekly chart we can see a concerning Spinning Top with a rejection at the 20 wma. If as I think probable that it means a pause within the mentioned countertrend rebound in the case the resistance zone is breached it could be forming a Head & Shoulder.
NDX has been the absolute leader from the April 18 low. After negating a potential Head & Shoulder it has climbed back to the March 7 high. It is now at a double resistance formed by the March top and the weekly upper Bollinger Band. In the mean time the weekly RSI is displaying a negative divergence.
The final outcome is doubtful. The up leg form the April 18 low is clearly corrective hence it should be a bearish wave (B) but this has been the general tendency of the rally from the 2009 low, whereby initially thought corrective waves (B) have morphed into bullish waves (A). So we will have to monitor if the MACD fails or confirms a bullish cross in which case a breakout above the March 7 high could result in an Ending Diagonal (Now in the initial stages of the wave III).
On Friday it has printed a Spinning Top after three consecutive closings above the upper Bollinger Band, hence at least a short-term pause is likely. We have two clear supports at the gap fill/close located at 3677.33 and at the last breakout located at 3625.77 that could allow the ignition of another up leg. If the trend line off the April 15 low is breached then a Double Top could be in place.
I will monitor:
• The McClellan Oscillator, which has been displaying a negative divergence since its peak on May 27, but as long as it remains above the Zero line another up leg is possible.
• The Summation Index, during the third week of May issued a buy signal from an extremely oversold reading. Usually the next sell signal should occur once the RSI enters the overbought zone (Not there yet).
XLF could also have already a top in place. As the others the internal structure of the current rebound is corrective, but probably not over yet. The support is located at the weekly gap at 22.03
If it is able to gain more traction to the upside I doubt that a weekly close above the upper Bollinger Band will be sustainable.
In contrast to IWM and NDX, XLF on Friday printed a bullish engulfing candlestick questioning the scenario of an immediate pullback. The next resistance is located at 22.34 then there is white space until 22.50; the support is located at the gap fill at 22.03.
Until proven otherwise in my opinion the current rebound should be a wave (B) hence I expect a lower high. Maybe it is forming a bearish flag.
Regarding SPX, for a long time I have been following the Double Zig Zag (From the 2009 low) as preferred Elliott Wave count, and I have also suggested that price form the October 2013 low has been forming a terminal pattern (Ending Diagonal), which should conclude the corrective rally and open the door to a major reversal.
Even though in the chart it looks like price is on the verge of establishing the last wave of the assumed wedge, in my opinion if the wedge is not busted it will morph into a larger one for the following reasons:
• The daily RSI (14) is not displaying a negative divergence hence an immediate top is doubtful. In the mean time the extreme overbought reading of the RSI (5) is suggesting that a pullback is likely.
• The 10 dma of the NYSE ARMS Index is not overbought hence it would be odd to have a top already in place.
• The NYSE Advance-Decline Line is not displaying a negative divergence.
• Usually a reversal can occur when the 10 dma of the NYSE Advance - Decline Volume reaches the overbought line (We are not there yet).
Therefore, IF next week the Ending Diagonal were not busted we would need a multi-day meaningful pullback in order to generate negative divergences in the last wave up (As long as the assumed wave V is smaller than the wave III).
According the extreme overbought readings of momentum indicators and the negative divergence of the NYSE Advance - Decline Volume, which since May 21 has established lower highs while SPX was making higher highs and the negative divergence of the 60 min RSI, a pullback starting on Monday is possible despite the strong bullish seasonality of the first day of a new month.
NYSE Advance-Decline Volume:
SPX 60 min Momentum:
In addition SPX on Friday printed a Hanging Man Candlestick following four consecutive days above the upper Bollinger Band, again if we have a pullback and the Ending Diagonal is the correct pattern we need a deep retracement. The target box is located in the range 1900 (Gap fill) - 1889ish (Trend line support soo the April 11 low).
If next week instead of a pullback the upper converging trend line of the assumed Ending Diagonal is busted, I would be clueless regarding the long-term Elliott Wave count, while the next resistance would be located at the blue rising trend line in the 1960 area.
Regarding the DOW, it could as well be forming an Ending Diagonal with starting point on February 5.
Next week we have two major risk events: On Thursday ECB meeting (The entire planet is expecting a major move from Mr Draghi) while on Friday we have NFP.
