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SP500: Oversold Rebound - How Far Can It Go?

We have a countertrend rebound underway. Where it will fail?

Monthly time frame: The trend is down

  • Price is well below the 10 mma
  • From the May high we have a sequence of lower low / lower high

However bears have to breach the trend line from the 2009 low in order to open the door to a large correction that could aim at the massive support zone 1573-1553

S&P500 Monthly Chart
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There is a potential Head & Shoulder that has a measured target at 1611, but if bulls are able to achieve an end of month print around 1968 ish it would result in a monthly Hammer, which would most likely invalidate the bearish pattern.

S&P500 Monthly Chart 2
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Weekly time frame:

  • From the May high we don't have an impulsive decline, instead so far price has unfolded a 3-wave down leg (ABC)
  • In my opinion the wave (C) is not done yet (Fibonacci extension targets are in the range 1776 - 1683)
  • This week the Hammer candlestick is suggesting that a short-term bottom is in place. Hence odds should favor a larger rebound
  • Above the high of the week we have Resistance 1 at 1950 and Resistance 2 in the range 1972 - 1993
  • The support is located at 1866

S&P500 Weekly Chart
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If my EW count is correct the down leg from the November 11 lower high is the wave (C) of a Zig Zag / Double Zig Zag / Triple Zig Zag

Hence a wave (C) can either be impulsive or an Ending Diagonal

a) Wave (C) impulsive:

If this is the correct pattern the current rebound is a wave (4) and should not substantially breach the resistance located at 1950 ish. The following down leg will complete the Zig Zag from the May high and the pattern will have to be reassessed

S&P500 Weekly Chart 2
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b) Wave (C) Ending Diagonal:

If SP 500 is carving out an ending diagonal the current rebound will be much larger. But the Converging Pattern will require more time in order to be completed (A sequence of 5 overlapping waves within two converging trend lines)

Wave C Ending Diagonal
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Daily time frame:

  • If the current rebound is a wave (4) I have highlighted in the chart below the important price levels that we have to monitor next week
  • If Friday's gap is closed then the rebound will most likely be over.

S&P500 Daily Chart
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  • I am going to watch the RSI (14) that should not breach the trend line resistance from the November high

S&P500 Momentum
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In the technical front two breadth indicators are suggesting that maybe the oversold rebound could be large:

  • Tick Cumulative is extraordinary bullish

TICK Bullish Chart

  • The McClellan Oscillator could display a breadth thrust if next week the zero line is reclaimed with authority

NYSE McClellan oscillator Daily Chart

Regarding VIX If it drops below the support located at 20 ish with a likely bearish signal cross of the MACD then odds would favor a large SP 500 rebound

VIX
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Lastly we have to monitor Oil. Maybe it is forming a large Falling Wedge. If this is the case the upper trend line is at 37.80 ish (20% of upside)

Due to the positive correlation if this pattern plays out it would also favor a larger rebound of SP 500

S&P500 Weekly Chart 3
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