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SPX: The Ending Diagonal Scenario

I begin the weekly update with the same SPX daily chart that I published last week

Last Friday we did not know if price was going to break the sequence of higher lows. We ended the week below the 50 dma with a sort of Shooting Star

In addition SPX had three failed attempts to sustain the uptrend above the December high.

The good news is that SPX has ended a solid-constructive week reclaiming and retaining both the 50 dma and the December high.

Is the fourth time the charm?

In my opinion as long as SPX does not drop again below the 50 dma odds now clearly favor the resumption of the uptrend with a shot at a new all time high provided that the trend line that connects the February and March highs does not delay it with a potential Triangle.

S&P500 Daily Chart
Larger Image

In addition the NYSE Summation index has confirmed a new buy signal, which should remain in force until the RSI enters the overbought zone, it peaks and reverse to the downside. This new buy signal occurs with the RSI not too far from the overbought line.

NYSE Summation Index Daily Chart

The weekly stochastic (5,3,3) of the NYSE Summation Index usually follows a path: It enters the oversold zone then it triggers a buy signal then it enters the overbought zone and it triggers a new sell signal. If this sequence plays out we should expect several weeks of bullish activity. However this is not rocket science hence there is no guarantee that the Stochastic will cross the overbought line but as long as the buy signal is not cancelled odds favor the upside in the equity market

NYSE Summation Index Weekly Chart

The behaviour of the McClellan Oscillator is the prevailing element that will determine if the SPX pending new leg up to new ATH has a weak or strong foundation. As we can see in the chart below since November the McClellan Oscillator has always stalled in the range 32 - 37.50. This is the main reason why SPX has been trendless since the December high

NYSE McClellan Oscillator Daily Chart

We also need to see an improvement of the % of stocks trading above the 50 dma since so far it is displaying a negative divergence. If the market rallies and the participation among stocks narrows it could mean two things: Either SPX remains trapped in a trading range or it is approaching a Top.

S&P 500 Percent Above 50DMA Daily Chart

If SPX has kicked off a leg up to new ATH I will monitor the 10 dma of the NYSE Advance-Decline Volume since spikes above the 200 line usually mark the end of a rally.

NYSE Advance-Decline Volume Daily Chart

I am also monitoring the 10 dma of CPCE, which should drop below 0.60 in order to increase the odds of a potential top.

CBOE Options equity Putt/Call Ratio Daily Chart

And lastly we have to monitor VIX, which could be carving out a Falling Wedge.

With an oversold RSI (5) and and eod print at the lower Bollinger Band odds should favor a rebound.

The odds that this potential Wedge can pan out will substantially increase when it is observable a positive divergence of the RSI

VIX
Larger Image


SPX Weekly time frame:

  • The constructive week has allowed SPX to recapture the trend line from the October low and reclaim with authority the 20, 5 and 10 week moving averages.
  • The next near term resistance is at 2110 ish while support is at the 10 wma = 2083
  • At the end of Friday it seems more probable that the pattern unfolded from the December high is synonymous of consolidation rather than distribution

S&P500 Weekly Chart
Larger Image

As I have already discussed in my weekly updates since the July high SPX has been rising within the boundaries of a wedge pattern and it is possible that from the December high price has been carving out an Ending Diagonal. If this is the case SPX is approaching the final stage of the wedge, which could culminate in one more leg up or with some more gyrations

S&P500 Ending Diagonal Weekly Chart
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This potential terminal pattern that could open the door to a multi month/year retracement is also discernible in the Dow and NDX:

  • Dow:

DOW Ending Diagonal Weekly Chart
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  • NDX:

NDX Ending Diagonal Weekly Chart
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I am also closely monitoring XLF since in my humble opinion it could be warning that a reversal could be on hand.

Major concerning reasons:

  • It has been badly lagging the equity rally from the March 2009 low. On Friday eod print it is still 53% below its 2007 top.

XLF Weekly Chart
Larger Image

  • The December Spinning Top followed by the January Engulfing candlesticks (Potential reversal pattern) have not been cancelled yet.

XLF Monthly Chart
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  • Since the December high it is displaying relative weakness vis-a-vis SPX. The ratio is now below the 20 dma and for the first time since 2012 it has lost the 100 dma:

XLF:SPX Weekly Chart

  • We could make the case that XLF has completed an Ending Diagonal at the December high:

Although the pattern following the assumed Ending Diagonal is messy the risk of beginning a sequence of lower lows/highs is quite large.

Last week XLF clearly underperformed.

If next week it loses the 50 dma it would be a negative signal.

XLF Ending Diagonal Chart
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SPX daily time frame:

  • As I have discussed last week in Twitter/Stocktwits despite last week rally SPX could still be forming a bullish Triangle. Next week we have JPM, WFC, BAC, C and GS earnings release. If there is a negative reaction the Triangle could pan out. If this is the case the 20 and 50 dma will come into play once again.
  • If Friday's gap up remains unclosed then odds would favor a breakout to new ATH provided SPX leaps over the last hurdle of the trend line that connects the February and March highs

S&P 500 Daily Chart
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Since the McClellan Oscillator is displaying a negative divergence odds should favor a pullback, which will not jeopardize the current trend as long as it remains above the zero line:

NYSE McClellan Oscillator Daily Chart

 

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