So far Momentum and Breadth Indicators were flashing warnings of a looming reversal
Now we are starting to see that price is beginning to stumble.
I will begin the analysis with XLI (Industrial Sector ETF), which is probably one of the weakest sectors
XLI weekly time frame:
- We can make the case that XLI completed an Ending Diagonal in February
- There is also observable evidence that from the March Low XLI has formed a potential Bearish Flag.
- If the Flag plays out the measured target is at 52.34 although we can see in the chart that if the horizontal support at 54 ish is breached there is "white space" until the October low
XLI daily time frame:
- From the February high we have a sequence of lower low/high
- On Friday XLI lost the 50 dma
- If the lower trend line of the Flag and above all the 200 dma which stands at 55.47 were breached it would most likely confirm a trend reversal
Next the Dow Jones Industrial Average (DJI)
DJI monthly time frame:
- We have a monthly Shooting Star
- A Shooting Star can be a reversal candlestick pattern
- We have the pivot support at the 10 m ma = 17610
- If the 10 m ma is breached (eom print) we have two "macro" supports:
- Support 1 at the February low = 1703 and at the trend line from the October 2011 low
- Support 2 at the October 2014 low = 15856
DJI weekly time frame:
- The two weeks ago Shooting Star followed by this week selloff is suggesting that the Ending Diagonal could be done. It will be confirmed once the 27 w ma = 17885 is breached
- We have support 1 at 17733 but usually price retrace towards the origin of the Ending Diagonal, which is located at the October low
DJI daily time frame:
- From the May high we have a sequence of lower low / high
- Price is now below both the 20 d ma and the 50 dma
- Even though a snap back rally is possible and maybe the 20 dma could even be reclaimed if breadth does not substantially improve price could establish a lower high confirming the trend reversal
- Daily oscillators are poised for further price weakness. The RSI is displaying a negative divergence, it has breached the trend line support and it has lost the 50 line. The MACD has a new sell signal in place. Odds should favour further weakness until the Stochastic crosses the oversold line.
Now lets have a look at the NYSE Composite Index (NYA):
NYA weekly time frame:
- We have a weekly close below the trend line of a potential Rising Wedge
- If next week the trend line is not reclaimed the Ending Diagonal would most likely be done
- We have support at the 27 w = 10947
- But if the Ending Diagonal pans out the initial target would be located at the December low
The negative divergence of NYAD Cumulative (NYSE Advance - Decline Issues) is flashing a serious warning that a top could be in place
While the NYSE New Highs is also unfavourable since from the March low the rally has been achieved with fewer stocks participation
VIX is also forming a wedge. This one is a bullish Falling Wedge
VIX weekly time frame:
- Probably the weekly Spinning Top is suggesting that it is not done yet hence maybe one more down leg is in the cards. When it is set and done the initial target is located at the December high
- If this scenario pans out the equity indices should rebound during 2-3 weeks before breaking down hence some indices might establish new ATH or 52 weeks highs.
- If instead the 27 w ma = 15 is breached then the Equity market should collapse
Lastly the SP500:
SP500 Weekly time frame:
- As discussed in my weekly updates SP500 is also forming an Ending Diagonal.
- It is not clear yet if a top is already in place.
- Once the Ending Diagonal is completed price should retrace the entire rally from the October low
- Even though last week Shooting Star is still in force price rebounded from the 10 wma, which is a positive sign.
- If a top is not in place the 10 wma must hold (eow print). If this is the case SP500 could complete the last wave (V) of the Ending Diagonal either at the trend line which connects the February and May highs at 2138 ish or at the upper Bollinger Band = 2154 ish (At the moment in my opinion this scenario is less probable)
Daily time frame:
- Since the decline from the May high is corrective maybe a top is not in place yet. If this is the case from the May 6 low price could be unfolding a Double Zig Zag, in which case we are now in the second wave (B).
- Unless on Monday price reclaims the 20 dma = 2112 with an Inside Day a retest of the 50 d ma is probable
- If the 50 holds the following up leg could establish another ATH if the 10 d ma = is reclaimed. If it fails establishing another lower high then a top will most likely be in place.
- Hence next Monday the ideal long setup would be a gap down and wait for a reversal in the area of the 50 dma
- I say wait for a reversal because the risk is that neither the 50 dma nor the lower trend line of the wedge might hold
- A huge short squeeze is needed in order to improve the vulnerable picture that the daily oscillators are displaying:
60 minute time frame:
- Elliott Wave wise the corrective internal structure of the decline from the May top should allow the resumption of the up trend with a new ATH
- In addition if last Tuesday´s lod holds there is a potential Double Bottom with a measured target at 2152 provided that in the following up leg the 50 h = 2119 is reclaimed and maintained
- Obviously this scenario needs a catalyst (Good news from Greece?)
The Event Risk Ratio (VIX:VXV) is favouring a bottoming process rather than a collapse
However without a breadth thrust a potential rebound is doomed to fail (It will establish a lower high). All things being equal the NYSE Summation Index is breaking down. It has dropped to the December low. Although it is oversold and the RSI(5) is displaying a positive divergence a bullish signal cross is needed (Above the 10 dma) in order to allow a sustainable move higher.
Next major event risks:
- Anytime: Greece
- June 5: US Employment Report
- June 17: FOMC