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SPX: Bulls are in a Precarious Posture

  • Wednesday unexpected sell off (wide range body) is a negative sign since SPX for the third time is failing to sustain the up trend above the early December high.
  • In addition Oscillators (Monthly-weekly and daily time frame) and Breadth are on a sell signal warning
  • However as long as the March 11 low (2040) holds Bulls could still manage to achieve another leg up (Probably the last one)
  • On the other hand if the "line in the sand" support is breached it could open the door to a Major Reversal if the next support located at 1980 also fails to hold.

SPX Daily Chart
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Monthly time frame:

  • As long as SPX does not print a monthly close below the 10 mma = 2019, price wise, we still don't have any sign that the rally from the March 2009 is ending.
  • When the 10 mma will be breached the risk is clearly of a major reversal with the first stop at 1820 then a retest of the October 2007 - March 2000 breakout range would be probable.

SPX Monthly Chart
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If we zoom in the time frame from the October 2011 low we can see that with two trading days left to end the month of March so far we have an Inside Month, which is not a bearish candlestick.

SPX Monthly  Zoom Chart
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However monthly oscillators continue to remain on sell signal warning. If the Stochastic loses the 80 line it will most likely open the door to a waterfall

SPX Monthly Momentum Chart
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Weekly time frame:

  • Here the "picture" is more bearish than bullish. Last week candlestick has negated the bullish prospects we had last Friday.
  • The only hope is that the lower trend line of the rising wedge holds.
  • In order to attempt to repair the technical damage bulls need next week an inside candlestick at least with an eod print above the 10 wma = 2071
  • If the trend line is breached it could open the door to a major reversal.

SPX Weekly Chart
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Weekly oscillators have even a worst look: Stochastic with a sell signal and below the 80 line and the MACD also with a sell signal. It is quite unusual that SPX is only 59 handles below its ATH.

SPX Weekly Momentum Chart
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Not only oscillators are flashing warnings, also Breadth indicators have ended the week with new sell signals:

  • NYSE Summation Index: New Sell Signal

NYSE Summation Index Chart

  • NYSE Advance - Decline Line: New Sell Signal, however since it is not displaying a negative divergence maybe SPX has not established yet a Top:

NYSE Adv/Decline Chart

In order to reduce the probability of a bearish scenario the McClellan Oscillator has to reclaim and retain the Zero Line:

CBOE Options Equity Put/Call Ratio Chart

But also the market behaviour has to change since so far we have Risk off:

  • Since the end of February Risk seeking is underperforming low volatility portfolio:

S$P Power Shares Daily Chart

  • TLT is sharply outperforming SPX:

SPX versus TLT Daily Chart

Volatility jumped higher, but it is not in a "spiking" mode.

Monthly time frame:

  • We can see that there is a resemblance of the pattern from the high of 1998 to the low of 2006 (It resulted in a huge spike to 89.53) with the one from the 2008 high to the present day. It seems that VIX is once again is forming a massive bullish flag.
  • The breakout of the previous Bullish Flag began once the 20 mma acted as support. On Friday VIX closed at the 20 mma. It will be interesting to see where VIX closes by the end of March:

VIX Monthly Chart
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Daily time frame:

  • In my last weekly update, I suggested that VIX like SPX could be forming a Wedge
  • The wedge could be completed (Black trend lines)
  • Or It could be a larger one delimited by the upper Green trend line
  • We will soon know which one is correct since if it is done it would be suspicious that VIX re-enter the boundaries of the converging pattern (Black trend lines)

VIX Daily Chart
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For the first time in a long time bull are in a precarious footing.

If the support at 2040 does not hold we could make the case that SPX has concluded a "massive" rising wedge that could result in a dreadful selloff since probably neither the 200 dma nor the support at 1980 would hold

This mega bearish pattern would be aborted if Bulls were able to reclaim the 20 dma = 2080

SPX Ending Diagonal Chart
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If the 20 dma is reclaimed then probably the unavoidable Top would could be delayed for few more weeks as Bulls will be doomed by another potential Ending Diagonal:

SPX Ending Diagonal Chart 2
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This potential Ending Diagonal could be formed also by the DJIA and NDX:

  • DJIA:

DOW Ending Diagonal Chart
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  • NDX:

NDX Ending Diagonal Chart
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Friday's spike of CPCE at 0.79 is suggesting a bullish Monday:

CBOE Options Equity Put/Call Ratio Daily Chart 2

Then bulls will need the best of lack to repair the damage during a shortened week holiday, as they are not allowed to fail

If by Thursday they reclaim the December high = 2080 maybe the unfinished Ending Diagonal scenario could be in play

SPX 60-Minute Chart
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