In my last weekend analysis I was adopting a sceptical bullish bias since the outcome of the EWP was suggesting that price could accomplish more business to the upside, above the October high, before rolling over.
The bullish outcome though had to resolve the bearish potential wave structure of the corrective rally off the October low.
Therefore as long as the pullback off the October 27 peak remained corrective this was my primary scenario.
Even if the Bullish Triangle was busted, price could have traced a Bullish Flag within 2 potential EWP:
- Triangle wave (B)
- Ending Diagonal wave (C)
Unfortunately both patterns were aborted.
I also mentioned that if price decided to go south a "murky" pattern could open the door to a bearish resolution:
The bullish set up was based upon an assumed Zig Zag = ABC
But in a three wave down leg the assumed wave (C) can morph into a wave (3) of a pending impulsive down leg or even into the first impulse of a wave (3)
On Wednesday I mentioned: "The bullish set up was under serious stress, not because of the price action, which can still be considered as an impulsive wave (C) but given the "bearish" signals that have been triggered by momentum and breadth indicators."
I was beginning to be aware that instead of a 3-wave down leg, price could be involved in a bearish resolution.
As a matter of fact it can be dangerous to entrust that SPX is involved in a bullish corrective pattern when Momentum and Breadth indicators are hinting something different:
1. Monthly Momentum:
- Stochastic triggered a bearish cross on June.
- MACD triggered a bearish cross on September.
2. Weekly Momentum:
- RSI has lost both the August trend line and the 50 line
- Stochastic has a new bearish cross
3. Weekly Summation Index has a new sell signal in place since the first week of November.
In addition sentiment is neutral, the AAII bull ratio should drop considerably before we can expect a major reversal to the upside.
Not to mention the Rydex Bear Fund Asset Flow, which shows a limited amount of flow into bear assets.
Therefore I have to adjust accordingly my long term working map.
Now the primary count calls for the resumption of the downtrend while the idea of a Zig Zag up from the October low is the alt count (low probability option).
In addition I can establish an initial (1×1) extension target at 1020 if price is tracing an ABC down off my July's nominal high.
I maintain the two potential scenarios I discussed on my last weekend post:
a) On July 2011 SPX established the top of the wave (X) from the 2000 peak.
If this is the correct scenario then price is now tracing the second double three = wave (Y) that should bring price back towards the March 09 low.
b) On July 2011 SPX established the top of the first up leg of (X) = wave (A).
If this is the correct scenario then price is now tracing a corrective pattern: Zig Zag, Double Zig Zag, Flat or a Triangle that will establish the bottom of the wave (B) from where it will resume the intermediate up trend with a wave (C) up that will have to complete the wave (X).
If the pattern in progress is a Zig Zag or a Double ZZ then price should drop towards a potential target range: 1010 - 927
So far both scenarios are valid and it is too early to favour one, in addition the 3-wave decline from "my nominal high" on July fits in both counts.
As I mentioned it is too early too know the real intentions of price in the long-term time frame but given the corrective nature of the down move off this summer's top if price remain inside the channel that I have highlighted in dark blue then the second option could be the correct one with a potential bottom in the 1010 area.
While if price is shaping the right shoulder of a "massive" H&S then the first option may be the correct one.
In the mean time we have a weekly Marubozu that is suggesting "selling exhaustion" and a possible bottoming process if next week we get a small range body or a Harami.
NDX should play an important role to puzzle out the true identity of the wave pattern.
The technology index still has:
- A potential not completed wave pattern off the October 2002 low if the Triple ZZ count is correct.
- A potential inverted H &S that portend higher prices.
- A corrective muddy wave pattern off the February peak that could be shaping a Triangle as long as the August low at 2035 is not breached.
SPX short term EWP:
It is a fact that the bearish set up has been revitalized by the sharp decline once the bullish triangle was busted and by the sell signals triggered by momentum and breadth indicators.
I am working with 3 potential patterns:
- Bearish impulsive fiver in progress with the wave (3) almost done.
- Ultra Bearish fiver in progress with only the wave (I) of (3) almost done.
- Bullish ABC which needs an immediate strong move above 1215.42
Thursday's Marubozu + Friday's Inverted Hammer + 0.618 retracement are suggesting that at least a s/t bounce is due.
Given the relatively proximity of the overlap and that the assumed wave (2) was established in 10 days it does not seem probable that price will spend a similar amount of time in shaping the wave (4) without an overlap. Hence a failure at the 50 dsma = 1206 will increase the probability of an extended wave (3)
I believe that a bottom of "some kind" is around the corner because:
1. Off 1264.17 we have a potential impulsive down leg completed/almost completed.
2. Positive divergence of the McClellan Oscillator which is extremely oversold
3. Positive Divergence of the NYSE adv-dec Volume
4. Four consecutive eod prints below the BB.
5. Thursday's Marubozu (potential selling exhaustion) + Friday's Inverted Hammer.
6. Friday's NYSE TICK = -1026
Once the expected rebound begins, which needs a move above 1172.66; the strength and internal structure will determine which one of the 3 options is the correct one. Keep in mind that if it is corrective then the bullish resolution will be immediately killed.
Bulls need FED style action from the ECB and the implementation of the rescue options.
The next ECB meeting is scheduled on December 8.
In the mean time next week we have several European bond auctions that will be watched closely, since financing the debt is becoming increasingly difficult even for Germany.
Then on Friday the attention will switch to the US NFP.