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SP500: The Risk of a New Bearish Cycle is Large

Monthly time frame:

The technical evidence is suggesting that the odds that SP 500 has begun a bearish cycle are large. To keep it simple we have four reasons:

  • MACD has triggered a bearish signal cross
  • The slope of the 10 mma has turned negative
  • The 10 mma has crossed the 20 mma; Red arrows (Pending confirmation at end of the month)
  • We have a sequence of lower lows/highs

If this is the case the trend line from the March 2009 low eventually will be breached and the MACD will lose the zero line. The bearish cycle should establish a bottom when the RSI crosses/reaches the oversold line

Initially as a guide we have three potential targets:

  • Target 1 (Shallow): 2000-2007 double top break out and 0.382 retracement of the rally from 2009 low in the range 1574-1553
  • Target 2 (Moderate): 0.5 retracement of the rally from 2009 low at 1402
  • Target 3 (Severe): 0.618 retracement of the rally from 2009 low at 1227

During a bearish cycle usually there are sharp snap back rallies that fail at the 10 mma. During the 2000-2002 bearish cycle there were five attempts while only two during the 2007-2009 one (Black arrows)

S&P500 Monthly Chart
Larger Image

Weekly time frame:

  • From the May top so far we have a 3-wave down leg (ABC = Zig Zag)
  • The assumed wave (C) can be the wave (A) of a much larger Zig Zag; the wave (W) of a Double Zig Zag or the wave (1) of an impulsive wave (C)
  • The Fibonacci extension targets for the wave (C) are located in the range 1776 - 1683
  • If the decline from the November lower high were impulsive then last week Hammer candlestick would have most likely completed the three wave decline from the May top. In my humble opinion a short-term bottom is doubtful. If this is the case a short-term bottom is more likely to be established at the trend line from the 2009 low, which is located at 177o ish
  • In the weekly time frame the key resistance levels are located at R1 (Trend line that connects the October-August-February 2015 lows) at 1893 +/-; R2= 1908 ish; R3 = 1947
  • If the wave (C) is in place R4 = 1972 and R5 = 1993 could come into play

S&P500 Weekly Chart
Larger Image

Daily time frame:

  • I have been suggesting that from the November lower high the current decline can be counted as impulsive
  • The issue is that the down leg from the February 1 peak is overlapping hence EW wise a bottom should not be in place (The wave 5 cannot be considered completed)
  • Even though next week I expect a larger bounce, if the R1 box (10 dma; 20 dma and trend line) is breached I expect SP 500 to fail at the R2 = 1927
  • If I am wrong, this is the initial stage of a move towards T1 or even T2

S&P500 Daily Chart
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60 minute time frame:

If the wave (5) is not in place we could have two scenarios. Once the wave (5) is in place I expect a large snap back rally that should establish another lower high.

  • Triangle:

S&P500 60-Minute Triangle Chart
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  • Ending Diagonal:

S&P500 60-Minute Ending Diagonal Chart
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