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

Despite the “bullish” reasons I mentioned yesterday which favored an oversold bounce, price did not kick off the expected rebound.

However since bears did not take the opportunity to extend the down leg in progress towards the next obvious support at 1396 and SPX ended the day with a an inverted hammer I maintain my short term bullish bias.

Therefore if bulls are able to regain the old support now resistance at 1422 then the bounce could reach the range 1434 – 1437

I expect the overdue bounce a selling opportunity since price should carry out at least one more down leg, which could complete the Double Zig Zag off the September 14 high.

I add this scenario to the Ending Diagonal option in the daily chart below (Black Count).

If the wave (B) rebound materializes then once it is in place we will have a potential extension target for the pending wave (C) down.

I suggest playing close attention to NDX since price is at the 200 d MA. Yesterday´s candlestick could be an exhaustion bar.

Here if we do get a multi-day bounce I don’t expect price to close the gap at 2744.17

The following down leg will be very interesting since if the positive divergences of the Nasdaq McClellan Oscillator are maintained then a double bottom at the 200 d MA could be possible.

If not  price could bottom in the range 2625 – 2610

Look at the Oscillator which is not collapsing and stubbornly is maintaining a positive divergence.

Another bullish reason can be found in the NDX internal structure of the down leg off the October 17 lower high.

We have a 7-wave down leg (Assumed wave (A)) that could be completed with an Ending Diagonal. If the ED plays out then the expected countertrend wave (B) rebound should top in the rage 2703 – 2734.56

Finally yesterday I mentioned that VIX had an unusual bar above the upper BB. Well we now have a second day in a row with the body completely above the BB. This is not sustainable hence I expect a pullback.

If this is the case then VXX should confirm a potential Double Top with a target at 35 from where it should carry out at least one more up leg.

Conclusion:

The pattern from the September 14 high is corrective; therefore price has not established a major top. Instead I expect a Fibonacci retracement of the June´s up leg. Once a terminal pattern can be detected I expect the resumption of the intermediate up trend. For the short term I expect an oversold bounce followed by at least one more down leg, which could establish the end of the correction if RSI and breadth indicators show positive divergences.