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SP500: High Alert - A Death Blow is Feasible

60 minute time frame:

  • The sideways and corrective pattern from the May 26 low, which was giving an edge to the resumption of the up trend, has been broken to the downside, hence now in the 60 min time frame we have a sequence of lower low/high. This is a potential initial sign of a breakdown.
  • Even though in my humble opinion the decline from the May high is not impulsive, the down leg from last Wednesday peak has weaken gradually and insidiously the opportunity to achieve another new all time high. Bulls now have the burden of having to reclaim, in the daily time frame, all the major moving averages: 10,20 and 50 dma. If they fail it will open the door to a likely reversal.
  • In addition in the 60-minute time frame we have another negative signal with the bearish cross of the 50 hma below the 200 hma
  • Therefore we could make two scenarios, based upon the likelihood of a rebound from last Friday's lod given the daily Doji:
  • If the rebound fails in the range 2104 - 2108, odds should favour a large impulsive wave (C) down
  • If bulls were able to reclaim and retain the 200 hma = 2111 then the probability of retesting the May high would substantially increase.

Without a catalyst and a breadth thrust the benefit of the doubt favours the Bears.

SPX 60-Minute Chart
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Even though it seems probable that Bears have an edge VIX ended on Friday with a shooting star, with the upper tail penetrating the upper Bollinger band with the consequent rejection at the 200 dma. This candlestick could flip the "spring balance" to the equity bullish side provided the sequence of higher lows/highs from the May 22 low is broken by the loss of 14.00 and the MACD daily signal cross is cancelled.

VIX Daily Chart
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If you have been reading my weekly updates you must be aware that I have been suggesting that SP500 is involved in a topping process with a potential Ending Diagonal. Today I think that we can formulate two potential Ending Diagonals.

  • Ending Diagonal 1: The lower trend line of the assumed wedge has been broken. If next week SP500 does not reclaim the 10 wma = 2105 odds should favour that this Ending Diagonal is set and done. The next directional move to the downside should be fast and furious with a likely target at the October 2014 low

SPX Weekly Ending Diagonal Chart
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  • Ending Diagonal 2: If Friday's lod holds and Bulls first reclaim the 10 wma and afterwards with "authority" were able breach one more time the solid resistance at 2120 ish then maybe a marginal new all time high could be achieved within the last wave (V) of a smaller Ending Diagonal:

SPX Weekly Ending Diagonal Chart 2
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If this pattern is the correct one, given the serious deterioration of momentum and breadth indicators I doubt that the state of oversold will allow this Ending Diagonal scenario to pan out without a catalyst that might trigger a huge short squeeze. Obviously I am thinking of good news coming out of Greece (So far there is not a hint of positive resolution)

The next event risks are FOMC on June 17 and Quarterly OPEX on June 19. But I doubt that price could remain in a holding pattern until then

Not only bears are gaining the upper hand by way of price but also Breadth indicators are horrendous. We don't have to analyse a ton of indicators to reach the same conclusion that price should soon give away if there is not a sudden breadth thrust. Just look at the chart of the NYSE Summation Index. It is falling to the abyss. You may argue that it is oversold but I would not bet the farm that a bullish signal cross is in the cards

NYSE Summation Index Daily Chart

Hence since a rebound is probable, but we don't know beforehand the potential target, going forward we have to monitor the McClellan Oscillator which on Friday was displaying a slight positive divergence (But it is not oversold). A rebound that it is not sold by eod requires the Oscillator to reclaim its 10 dma. Higher targets and even a new all time high will be possible only if the Oscillator does not fail at the Zero line. A negative McClellan Oscillator is a favourable environment for the Bears

NYSE McClellan oscillator Daily Chart


Daily time frame:

  • We have a daily Doji with the lower tail testing the trend line from the March 25 low (Lower converging trend line of the assumed Ending Diagonal 2) and penetrating the lower Bollinger Band. Odds should favour that the down leg from the June 3 peak is done, provided the 50 dma is reclaimed.
  • If the 50 dma is claimed back (Resistance 1) above we have three critical resistances
  • If the forthcoming rebound is just an oversold bounce it will probably fail at/below the Resistance 2, which is the 0.618 retracement of the previous down leg
  • Above the 0.618 retracement the odds of another shot to a new all time high will begin to rise.
  • Bulls will still have to prove that a reversal is not already underway by reclaiming the 20 dma. If at the same time VIX drops below 14.00 and we have a breadth thrust then this up leg could establish a new all time high within the scenario of the Ending Diagonal 2

SPX Daily Chart
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Conclusion: With the intention of having no bias or prejudice, in my humble opinion, we are finally seeing initial signs of a breakdown. In the recent past dip buyers have saved the trend, this time without a catalyst the risk of a "dead cat bounce" is large (A small upward oversold price movement in a potential new bear cycle)

 

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