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

Yesterday I suggested monitoring the EUR since with Wednesday´s hammer odds were very large that the 200 d MA would act as a brake on the pull back from the September 17 peak.

At yesterday´s eod, this pair formed another bullish hammer therefore it is “obvious” that price should attempt to achieve more gains in the next few days, until we see a reversal bar.

The immediate resistance is located at 1.2992

My view here is that the correction from the September 17 top is not over yet. We have the first leg in place of a potential 3 –wave down leg correction.

For the immediate time frame we have to be aware that as long as the EUR bounce extends higher the equity market will not resume with another down leg its corrective pattern.

The same scenario can be applied to SPX:

Price has completed the first down leg of a potential larger corrective pattern, hence now we should have a countertrend bounce in progress.

I rule out that price is kicking off the resumption of the up trend.

So now we have to wait for short-term extremes of breadth indicators (TICK, TRIN etc) and contrarian sentiment indicators like CPCE as warnings of an exhaustion of the current bounce.

As we can see in the daily chart below we have 3 key numbers to watch: 1450, which was tested yesterday, 10 d MA = 1455 then the lower high at 1467.07

Regarding the short-term price action and the EW count in the 30 min chart below I have labeled a potential map:

Double Zig Zag completed last Wednesday. This WXY can be one of the following: Wave (A) belonging to a larger Zig Zag, in which case the current rebound is a wave (B) that should establish a lower high (below the September 14 peak). Wave (1) of (C); which began on September 25. Wave (X) of a Triple Zig Zag off the September 14 top.

If it is a wave (B) then the rebound should carry price above 1452 and breach the trend line resistance, if it is a wave (2) of (C) or a wave (X) price should remain below 1453 – 1455 (10 d MA)

So far we have a 3-wave up leg so the chances for the 3 potential counts are not defined yet.

In the technical front:

The RSI 50 line confirmed the expected bounce. Now we have to watch the broken June TL but the critical one is the new trend line resistance (Blue one) Stochastic is approaching the oversold zone and remains with a sell signal in place MACD maintains the sell signal

The zero line of the McClellan oscillator should not be regained if my scenario is the correct one

Lastly just a short comment on the VIX.

Yesterday it collapsed by dropping almost 12%

Usually such a big move has residual inertia until we see a bottoming candlestick. I have 2 speculative small trend lines that could act as support but at the moment we cannot rule out a retest of 13.61 or even the huge trend line support at 13.20

What seems to be working are the buy/sell equity signals triggered by the envelope bands (Bold blue bands)

It is worth noting that VIX could be shaping a large bullish falling wedge.

Have a great weekend everyone