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SPX: Another Failed Breakout

The trend line that connects the three lower highs from the March top is resulting to be the "bete noire" for the bulls.

SPX has failed once again a break out and on Friday it has lost once again the 50 dma falling back at the range mid-point

Two questions:

1. Does this mean that it is game over for the Bulls?

Absolutely No

Bulls still can regroup at the 100 dma and even a marginal undercut under the pivot support at 2040 could result in a bullish Flag

Obviously if the 200 dma were breached things could get ugly

2. Is SPX involved in a topping process?

In my opinion the answer is Yes


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Monthly time frame:

  • So far we have another Inside month
  • As long as SPX does not print an eom below the 10 mma which, today stands at 2032, odds should favor a continuation pattern


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Weekly time frame:

  • Sort of neutral candlestick: the upper tail suggests the inability to overcome the resistance at 2110 ish while the lower tail suggests some buying interest at the dip
  • The support is clearly at the 20 wma = 2065
  • The suggested Ending Diagonal scenario is now under quarantine since if the trend line from the February low were breached it would be invalidated.


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Daily time frame:

  • There is a potential Triangle under construction (Continuation pattern) with the final wave (E) underway
  • If the Triangle is going to play out the assumed wave (E) cannot breach the lower contracting trend line. In other words the sequence of higher lows cannot be broken
  • The trend line stands just 1.20% below Friday's eod print
  • Hence if the triangle is correct SPX instead of a downward correction it should unfold a sideways one with more choppiness ahead


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60 minute time frame:

  • We can see that from the March low price has been rising within the boundaries of a Rising Wedge
  • On Friday the gap down and go has confirmed the bearish pattern.
  • This rising wedge is not an Ending Diagonal hence it should not be a terminal pattern
  • The 0.618 retracement of the move from the March low so far has held
  • Obviously this sharp decline should not be a one day bearish wonder hence the risk for the short-term remains to the downside


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  • In my opinion From the March low, with a truncated Ending Diagonal SPX has unfolded a Zig Zag
  • The decline from last Thursday's high could have concluded the wave (A) of a Zig Zag or a Double Zig Zag
  • If next Monday the 200 hma were reclaimed a wave (B) rebound could reach the target box that has a range 2089 - 2097
  • The following wave (C) down could have an equality extension of 39 handles (Moment of truth for the Triangle scenario)
  • This would be an "easy" scenario


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Therefore price wise odds should favor at least a Zig Zag down from last Thursday high

Now lets look at daily Oscillators and Breadth:

Daily Oscillators:

  • RSI (14) has breached the trend line support from the March low and on Friday it has lost the 50 line = Negative sign
  • RSI (5) should probably breach the oversold line before we can expect another rally attempt
  • Stochastic has a new bearish signal cross = Negative sign
  • The MACD must not cancel the Bullish signal cross if the Triangle is going to pan out


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Breadth:

1. NYSE Advance-Decline Line:

  • It has a new bearish signal cross = Negative sign
  • Absence of Negative divergence: Positive sign
  • Probably its RSI (5) will have to drop into the oversold zone before this correction can end

2. McClellan Oscillator:

  • It has crossed the Zero line = Negative sign
  • While its RSI(5) is crossing the oversold line the oscillator is still far from the Oversold line
  • As long as it remains below the Zero line bears will maintain the upper hand

3. NYSE Summation Index:

  • If as I think more probable that SPX is involved in forming a continuation pattern the bullish signal cross must not be cancelled

4. SPX % of Stock above the 10 dma:

  • According to this gauge SPX is not yet oversold
  • "The best" buying setup would occur when it drops to - 2 SD

Now lets have a look at VIX:

Weekly time frame:

  • As I have discussed in my last weekly update VIX has been forming a potential "Massive" Falling Wedge
  • We have an end of week "bullish" Harami
  • However as long as it does not have an end of week print above the 10 wma = 14.27 we should not rule out another lower low before the Wedge is set end done
  • The Stochastic has not a bullish cross yet


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Daily time frame:

  • Friday's price action looks more bullish than bearish for the equity market since in spite of the large gap up it ended the day with a large topping tail
  • The Stochastic is oversold but has not triggered yet a signal cross
  • Hence as long as the 200 dma = 15.15 is not breached VIX could still be trapped inside the converging trend lines although soon or later it will probably break to the upside


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If we look at the VIX tradable instrument (VXX) it also suggests that at the moment there is not "fear written in the face" of equity bulls. On Friday it broke the accelerated trend line of the last down leg but ended with a Shooting Star


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Next week in addition to seeking an opportunity to short SPX (Long SPXU) I will be looking for a short entry in IWM (Long TZA) and XLF (Long FAZ)

1. IWM

Monthly time frame:

  • It is rising within a well-defined channel
  • It has been one of the leaders since the October 2104 low
  • But the upper Bollinger Band is now a tough obstacle to be overcome
  • So far we have a monthly Spinning Top


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  • Monthly Oscillators have a "bearish look"
  • RSI on July has broken the trend line support off the 2009 low and it is displaying a negative divergence
  • Stochastic is overbought
  • MACD has a bearish signal cross in force since July


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Weekly time frame:

  • Since the rally from the October 2014 low is clearly corrective maybe it could be forming an Ending Diagonal


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  • If the support at 123.80 does not hold it seems to me probable that IWM should retest multi-month breakout at 120.60
  • If this is the case the next support could be located at the rising 27 wma
  • With just a marginal overlap below the March 2014 high it would be enough to validate the Ending Diagonal scenario


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Daily time frame:

  • From the December high IWM has been rising forming a potential Rising Wedge
  • The assumed Rising Wedge has not been confirmed yet since on Friday IWM dipped below the lower trend line but it has recaptured it by the oed
  • If the wedge (It is not an ending pattern) pans out, provided the support at 122.90 does not hold, the minimum decline required in order to validate the scenario of the Ending Diagonal would be a test at the 100 dma (3.3% decline)


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60 minute time frame:

  • The decline from last Wednesday high could be counted either as an impulsive or corrective down leg. But this issue at the moment is not important
  • Trading wise the important issue is that if next Monday we get a large bounce (Thanks to the Chinese news) without substantially move above the o.5 retracement, IWM would be forming a Head and Shoulder with a measured target at 120.50 (Fulfilling the requirement of the Ending Diagonal scenario)


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2. XLF:

Daily time frame:

  • I have already discussed that XLF could have already established a top at the December high
  • The corrective pattern from the January low so far does not seem able to launch XLF to a new 52 week high
  • For the short-term time frame it is a fact that last Friday XLF has broken a potential bearish Flag which has a measured target at 23.55 but we could even make the case that it could be forming a Head and Shoulder with a measured target at the February lows
  • Either way the loss of the 200 dma would be a negative sign


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