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SP500: The Uptrend is Vulnerable

Vulnerability Ahead

Monthly time frame:

  • For quite a long time I have been discussing that breadth and momentum indicators are suggesting that the aged rally from the March 2009 is vulnerable.
  • I have also mentioned that once/if SP500 breaches the 10 month moving average (2064.61) and the rising trend line from the October 2011 low, with an end of month print, it would increase the odds of a likely multi month/year correction (Potential new bearish cycle).
  • During the rally from the 2009 low the 10 mma has been breached twice: From the March 2010 top it resulted in a 17.12% decline which lasted two months and from the August 2011 top it opened the door to a 5 months correction and a 21.58% decline.
  • The March 2000 top resulted in a 2 years and 7 months correction with a decline of 50.51 % (From the March 2000 peak to October 2002 low) while from the October 2007 top the correction lasted 1 year and 5 months (SP 500 bottomed the March 2009 low) declining 48%. In both incidents once the 10 mma was lost it was never reclaimed until the bearish cycle ended.
  • If the two reversal requirements are fulfilled, obviously no one knows the extent of a potential correction, but we can make two assumptions:
    • The October 2014 holds (Maximum correction = 14.59%)
    • The October 2014 is breached, then probably SP500 could retest the major breakout area of the March 2000 - October 2007 highs, which coincides with the 0.382 retracement of the rally from the 2009 low (Correction = 26%)

SPX Monthly from 2009 Chart
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In the monthly chart below we can see the following:

  • The 10 mma so far has not been breached: No trigger yet
  • The June selloff has marked the first lower low since February 2015 hence the risk is that an oversold bounce could establish a lower high. If this is the case a trend reversal could be at hand.
  • If a lower high is established the next down leg will encounter the following support levels: 10 mm = 2064.61; Support 1 (June low) = 2056; Support 2 (March low)= 2040: Support 3 (Trend line from the October 2011 low) = 2005 +/-; Support 4 (February low) = 1980
  • If the trend line from the October 2o11 low is breached and not reclaimed it will increase the odds that the correction will be heading towards the February 2014 low at 1980

SPX Monthly Zoom Chart
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Weekly time frame:

  • From the October 2014 the overlapping rally is suggesting that price has formed an Ending Diagonal
  • The Ending Diagonal usually occurs in the last wave 5 of an impulsive sequence or in the wave (C) (Of a Zig Zag / Double Zig Zag or Triple Zig Zag)
  • An Ending Diagonal is a terminal pattern and it is usually followed by a decline that retraces back to its origin (October 2014 low)
  • During the formation of an Ending Diagonal breadth and momentum indicators display negative divergences, fewer stocks are participating in the rally and large Institutions are distributing stocks.
  • So far from the assumed May top the decline has not been impulsive, which is deviating from what would be an ordinary selloff following a completed Ending Diagonal but the lower trend line of the potential Ending Diagonal has not been reclaimed, therefore for the time being I am working with the supposition that SP 500 has concluded an ending pattern.
  • Last week SP 500 lost the 27 week ma. In the weekly time frame the 27 wma is a demarcation moving average like the 10 mma in the monthly time frame. On Thursday price bounced from the lower Bollinger Band but it remained below the 27 wma, printing a sort of Hammer candlestick.
  • If next week bulls reclaim the 27 wma there is white space until the 20 wma (2097) - gap fill (2101.61). If the gap were closed the terminal pattern would mot likely be aborted.
  • If instead next Monday we have a gap down there is white space until the next support, which is located at 2040. If it does not hold the trend line from the October 2011 low at 2005 +/- would come into play.

SPX Weekly Ending Diagonal Chart
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  • Weekly Oscillators look terrible

SPX Weekly Momentum Chart
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Daily time frame:

  • We have a potential Head & Shoulder with a measured target at 2008

SPX Daily Chart
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  • On Thursday SP 500 printed a Doji. We already know that the current bounce is a countertrend move that is doomed to establish a lower high (It is corrective). The issue is if the Doji has established the end of the rebound or if price has more upside in store. Since the outcome is uncertain we can make two assumptions:
    • Next Monday we have a gap up and Thursday's hod is breached then a larger rebound should stall either in the range 2093-2096 (Huge resistance zone: 0.5 retracement; 10-20-100 dma) or in the range 2100.61-2101.71 (Gap fill - 0.618 retracement)
    • Next Monday we have a gap down and price breaches the neckline of the H&S, then odds should favour the resumption of the down trend with downside target in the 2008 range (Fulfilling the H&S target)

SPX Daily Zoom Chart
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60 minute time frame:

  • From the May high we can count a 7-wave down leg, hence the current bounce is either the wave (X) of a Triple Zig Zag or the wave (2) of a much larger wave (Y). This bearish scenario will remain valid as long as the gap at 2101.61 is not closed
  • All things being equal this corrective decline calls into question a major reversal

SPX Hourly Chart
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  • The following 60 min chart which I posted on Twitter/Stocktwits after the close last Thursday explains the potential short term outcome
  • If we have a larger bounce it would be a "gift" for the traders willing to open or increase a short position

SPX Hourly Chart 2
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