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SPX: RIP The Ending Diagonal. Equity Bears Have Been Defeated Once Again

The suggested ending pattern has been negated; probably it was too widely followed.

Last Wednesday, due to the lowest CPCE reading of the last three years and a concerning widening divergence between the McClellan Oscillator, which closed below the zero line, and SPX daily new ATHs I thought that odds should have favoured a pullback that could have have established the wave (IV) of the Ending Diagonal scenario. Actually on Thursday, the initial reaction to the ECB news was to the downside but it did not last too long, suddenly sellers disappeared and SPX achieved a strong rally the moment it crossed the upper trend line of the assumed Ending Diagonal probably a huge short squeeze of the "wedge players".

The fact of the matter is that the inevitable top of the corrective 5 years rally from the March 2009 low has been delayed for a few more months since a new ending pattern needs time to be formed. Therefore going forward although there will be pullbacks the trend remains for the time being firmly bullish.

As I mentioned in my last weekly update a new bear cycle will be confirmed with a monthly close below the rising 10 mma, which today stands at 1836. Once the "line in the sand" is breached probably price should retest the major break out; former resistance, now support, located in the range 1576-1553.

In the mean time we have a theoretical extension target located in the range 2011- 2171.

SPX Monthly Chart
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Since by the time we have the confirmation of the trend reversal price will have already dropped considerably we can use the 5 mma which today stands at 1898 as an earlier warning of a likely bearish shift. (Both moving averages must be confirmed with a monthly close below them).

SPX Monthly Zoom Chart
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In the following weekly chart I have drawn a potential channel delimited by the two red trend lines and a blue trend line that connects the May 2013 and January 2014 highs. Going forward this trend line could become a meaningful trend line resistance.

The obvious support is at 1897

SPX Weekly Channel Chart
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Zooming in the weekly chart we can derive the following:

  • From May 23 we have three long white candlesticks, in addition on Friday it closed above the upper Bollinger Band. Obviously this move is very extended. It would be extremely rear two consecutive weekly closes outside the Bollinger Band; therefore next week odds should favour at least a consolidation phase, which could print a small range body.
  • A weekly close below the Bollinger Band should trigger a sell signal
  • The busted rising trend line of the negated wedge, which next week stands at 1933 +/- if it does not hold should open the door to a retracement.
  • As long as the 3 wma is not penetrated I would not expect a large pullback.
  • As long as the support zone (Gap fill and April 4 high) is not breached the up leg from the April 11 low can extend higher with a potential target at the blue rising trend line resistance, which next week will stand at 1966.

SPX Weekly Zoom Chart
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In the following daily chart I have labelled the advance from the April 11 low as a Double Zig Zag. If this count is correct we should be damn close to the end of the second wave (A).

Once Friday's gap is closed we would have the confirmation that the second wave (B) is underway with a potential target in the range 1923 - 1904

The assumed corrective Elliott Wave count of the advance from the April 11 low will be concluded with the last wave (Y) up.

SPX Daily Chart
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The daily RSI, which is extremely overbought, should display a negative divergence once the up leg from the April 11 low is done. Usually such a strong upside momentum does not end abruptly therefore odds favour my preferred count since a multi-day pullback would allow displaying a negative divergence with the wave (Y) up.

SPX Daily Momentum Chart
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In my opinion the Double Zig Zag count can pan out since the thrust following a likely Triangle wave (X) cannot be counted as impulsive hence it should be the second wave (A). This wave (A) may be unfolding a Zig Zag (abc) with an impulsive wave (c) underway from last Wednesday low.

Since on Friday there is no indication that this up leg is done it could extend higher with a potential target at the 0.618 extension, which is located at 1954.5, provided Friday's gap at 1948.46 is not closed.

If this is the case the following wave (B) pullback should bottom in the range of the 0.382 - 0.5 retracement (1921-1911).

SPX 60-Minute Chart
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In the technical front:

  • The Summation Index instead of dropping to the oversold zone as it seemed likely it has recycled back up. Now odds favour more upside until the RSI enters the overbought zone. Usually the RSI remains overbought for some time before a new sell signal is triggered.

SPX versus NYSE Summation Index Chart

  • Actually the weekly Stochastic of the Summation Index has issued a new buy signal cancelling the sell signal triggered during the second week of May. Therefore now odds favour that the next sell signal should occur once the Stochastic enters the overbought zone, maybe at the end of June.

NYSE Summation Index Weekly Chart

  • If this is the case the McClellan Oscillator from its May 14 low must maintain the sequence of higher highs/lows in which case it could reach the overbought line

NYSE McClellan Oscillator Chart

On the subject of the long-term Elliott Wave count (From the March 2009 low) since the Ending Diagonal has been negated probably the assumed Double Zig Zag has morphed into a Triple Zig Zag. If this idea is correct from the October 2013 low price should unfold a Zig Zag (ABZ) with a theoretical extension target in the range 2018-2066

Now we have the same issue I discussed regarding the up leg from the October 2013 low to the January high, which is clearly corrective. Once again the up leg from the February 7 low is also corrective therefore since the last wave (Y) or (Z) must be impulsive the absence of impulsiveness should result in an Ending Diagonal.

SPX Weekly Triple Zig Zag Chart
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In the following daily chart we can see that so far this scenario could have a chance to pan out since the advance from the February 5 low can be counted as Triple Zig Zag therefore we already know that it cannot establish a major top.

If the corrective pattern of the up leg from the February 5 low is completed by the end of June a meaningful pullback should take place probably during the month of July and August. When sentiment turns bearish a new catalyst before price can jeopardize the intermediate up trend, most likely from Central Bankers, will ignite another huge rally. Dejavu?

SPX Daily Triple Zig Zag Chart
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In the mean time maybe VIX could be forming a massive falling wedge.

VIX Monthly Chart
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