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SP500: The State of being Confused

The State of being Confused

I am really in a puzzle over how SP500 remains supported in spite of extremely weak oscillators (Both monthly and weekly) and breadth indicators.


Monthly time frame:

  • We still have three weeks to end the month of July so it is a bit premature to come to any conclusion regarding if a top is in place or if from the May high SP500 has been involved in a shallow corrective phase (A possible scenario given the corrective internal structure of the decline)
  • So far during the first two weeks of July the 10 mma has been breached temporarily. Last week Greece-related optimism has allowed recapturing it. Since the October 2011 low the 10 mma has been probed four times (October 2012, November 2012, October 2014 and February 2014), in each occasion it has acted as an unbreakable support.
  • Therefore so far there is no bearish trigger

SPX Monthly Chart
Larger Image

In addition to the ability to recover readily from adversity, with just a 50 handles drop form the May high the 10 dma of the Equity Put/Call ratio has surged to the highest reading since July 2014 (Even above the print reached at the October 2014 low). It is enigmatic that there is a great deal of fear when SP 500 has not breached yet any technical support. Extremes (Both fear and greed) often result as a contrarian indicator.

CBOE Options Equity Put/Call Ratio Chart

We also have several breadth indicators that are deeply oversold. During this bull market these oversold readings have led to positive returns:

  • 10 dma of NYUD:

NYSE Advance/Decline Volume Chart

  • And there are even breadth indicators like the SP 500 percent of stocks above the 50 dma that are displaying a positive divergence at last week low:

S&P500 Percent of Stocks Avove 50-Day MA


Weekly time frame:

  • I remain perplexed since we could make the case that SP500 at the May high has concluded an Ending Diagonal. This ending pattern is suggesting a potential retracement towards the October 2014 low
  • However the decline from the assumed top has not been impulsive (Another intriguing issue)
  • Hence my assumption is that until proven wrong the Ending Diagonal is viable and despite the decline is corrective it can morph into a larger bearish pattern provided the gap at 2101.61 is not closed
  • If next week SP500 reclaims the 27 wma (2084) then from the May high we could make the case that a Zig Zag is in progress (Subject to not closing the gap at 2101.61). If this scenario plays out the following wave (C) down could breach the trend line support in force since the October 2011 low. The aftermath would be unknown but clearly the technical damage should favor a trend reversal
  • Right now, honestly, I don't have a sound (Based on valid reasoning) EW bullish pattern to discuss

SPX Weekly Chart
Larger Image


Daily time frame:

  • In addition to the Ending Diagonal scenario, in my last weekly update I discussed the potential Head and Shoulder pattern, which is believed to be one of the most reliable reversal patterns.
  • In my opinion it can be consider valid as long as the 50 dma (2101) is not reclaimed
  • If the Head & Shoulder plays out the loss of the 200 dma would be a bad omen

SPX Daily Chart
Larger Image

  • Daily oscillators are poised for a larger bounce. In a down trend a positive divergence of the RSI usually opens the door to oversold rebounds (Or even lasting bottoms). We have to monitor the 50 line of the RSI (14), since in a countertrend bounce the 50 line should not be substantially breached. Maybe this bounce could continue until the RSI (5) reaches the overbought line.

Daily Momentum Chart


60 minute time frame:

  • The decline from the May high has unfolded a likely 11-wave structure (Triple Zig Zag). I am assuming that last Wednesday the truncated wave (Z) has established the wave (A) of a larger Zig Zag down. If this is the case, provided the 50 hma (2067,54) holds, the current wave (B) rebound MUST not close the gap at 2101.61; the following wave (C) down should fulfill the Head & Shoulder target at 2007

SPX 60-Minute Chart
Larger Image

 

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