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

Reminder:

Price is involved in unfolding a corrective pattern from the September 14 high. If price breaks the 1430 – 1422 key support layer then the current corrective EWP should at least extend towards the target = 1397 – 1395.  I consider it a likely outcome. Once price reaches the mentioned target and we have positive divergences then price should attempt to resume the intermediate up trend. If price fails to establish a bottom then the next likely potential reversal zone is located in the range of the rising trend line support in force since the October 2011 lows and the 0.5 retracement of June’s up leg where we also have the 200 d MA = 1370

Since yesterday price negated an impulsive sequence from the October 5 lower high, the overall EWP is getting more complex and probably the final target will be closer to 1396 than 1370.

Keep in mind that in addition to the planning of Mr. Bernankes, October is usually a month were important bottoms are established.

First of all I want to show you again the potential reversal pattern (Ending Diagonal) that VXX seems to be forming for two reasons:

It needs to extend a larger wave (V) If the ED plays out once the wave (V) is in place, price will takeoff.

If the Ending Diagonal plays out we know that:

The correction of the equity indices is not over. For the short term a bounce is in the cards.

Daily momentum is also suggesting that the odds for multiday bounce are large since we have the Stochastic in oversold territory and the RSI is no longer pointing down. Here we know that any bearish bounce must maintain the RSI below the Trend Line Resistance.

As I mentioned yesterday the absence of positive divergence of the RSI reduces the solidity of the 1430 support, therefore the probability that it will be breached is large.

The McClellan Oscillator should give us clues regarding the longevity of a potential multi-day bounce. Here we have a trend line resistance and the zero line where the Oscillator is expected to reverse to the down side. On the other hand if it breaches the peak established on October 5 all bearish bets are off (I give a low probability to this outcome)

The NYSE Adv-Dec Volume has a positive divergence ==> another warning of a potential bounce.

And we can also see that selling pressure has been really muted during the down leg off the October 5 lower high.

Now lets move on to the daily SPX chart.

Due to the “killing” of a potential impulsive wave (C) down even if the end result should be similar I have to modify the potential count to a Double Zig Zag. If this EWP is the correct one price is now involved with the wave (A) of the second Zig Zag.

Going back to the oversold readings of the Stochastic here we also have price attacking the lower BB, which usually is also a warning of a potential pause of the downtrend. If today we see further weakness I doubt that price will establish an eod print below the trend line support off the June lows and the 50 d MA = 1427

If a multiday bounce is in the cards then price MUST fade and reverse at the target box = 1447 – 1451

Even though the pattern of SPX  is getting more complex we should not lose sight of the DJIA Double Top target at 13081.

By the way yesterday´s Inverted Hammer is another warning of a potential short-term bottom. Maybe today price will test the June´s TL & 50 d MA = 13081

Have a great weekend !!!!