Date: October 2012: SPX: Follow Up of the Short Term EWP | The wave trading

Luckily today I don´t have anything substantial to add to what I have been discussing regarding the short-term scenario.

As a reminder below Is what I wrote on Sunday:

“From the September 14 high so far we have the first down leg at 1430.53; wave (A) of a potential Zig Zag or Double Zig Zag down. As I mentioned last Thursday: The irrefutable fact that the current bounce from the September 26 low at 1430.55 is overlapping gives to me a huge confidence that the next directional move is going to be to the down side.

This counter trend bounce is the assumed wave (B). In order to consider that the bounce off the September 26 is over price has to move back below the 20 d MA and close Wednesday’s gap up at 1450.99 with an impulsive internal structure, unfolding the wave (C). The “sine qua non” on which much depends for my preferred scenario to play out is that price will have to break through the huge support layer 1430 – 1422 where we have the last reaction low + Trend Line support form the June lows + April 2 high (previous break out area) + rising 50 d MA.

If we do have a down leg but price does not breach 1430 then my count of the June´s up leg is wrong, as it will most likely extend higher towards the next resistance located in the area of 1500.

Friday´s price action, with SPX gaping up to close lower leaving a bearish Spinning Top, is a strong sign that the bounce off the September 26 reaction low could be done. If it is completed then bears need an eod print below 1456.89 by next Monday/Tuesday.While closing last Wednesday´s gap at 1450.99 will most likely seal the deal opening the door for the next battleground in the range 1430-1422. If 1422 goes then price will most likely drop quickly to the next support at the 0.382 retracement = 1396

If we move on to analyze the internal structure of the rebound from the September 26 low we can see that.

We can have a completed corrective pattern = Double Zig Zag = wave (B) The initial down leg off last Friday ‘s hod can be counted as impulsive; hence it can belong to the initial stage of the wave (C) down.”

Therefore the short-term bearish scenario is on track.

Yesterday price confirmed with a tight sideways bounce that dip buyers are gone.

The move can even be considered completed with a Double Zig Zag.

If it is over then the next wave (3) down has an extension target in the range: 1440 – 1430

Technically we also have evidence that the trend has shifted to the downside:

RSI has breached the short term rising trend line support and now it is once again below the June trend line. Now a test of the 50 line is done deal.

McClellan Oscillator has breached the rising trend line support and it is back below the zero line

Keep in mind that if price has in mind a correction that will carry price below the support range 1430-1422 then positive divergence of the RSI and the McClellan Oscillator are not allowed == > 50 line of RSI and -44.86 of the MC Oscillator have to be breached.

In the daily chart below we have all the info we need to monitor in order to maintain the degree of high confidence that price is involved in a larger corrective pattern from the September 14 high:

First objective has been met with the eod print below 1456.89 Now price has to remain below 1463.14 In the next down leg price has to close the small gap at 1450.99 In order for the bears to claim control over the short term trend they need to push price below the 10 d MA and breach the rising trend line support from the September 20 lod. The moment of truth will be established in the battlefield located in the range 1430- 1422 If 1422 goes then there is only thin air above 1396. This is a  potential target for the correction. The extension target range for the assumed wave (C) down is 1426 – 1399

Lastly I once again suggest monitoring closely VIX

As I mentioned last Sunday VIX has a potential Double Bottom project, which is strengthened by RSI positive divergence.

I am clueless if this bearish (for equities) pattern will play out but in my opinion odds are large for at least a move towards the September 26 peak at 17 as long as yesterday´s gap is not closed. We shall see how this potential reversal pattern evolves.

Speaking about Double Bottoms, SPXU has a “nice” one: