View: WEEKLY ANALYSIS 1111 | The wave trading

Last Wednesday´s price reaction to Obama victory has resulted in a sharp sell off which has broken a significant technical support located at the 200 d ma. On Friday despite an attempt to establish a short-term bottom bulls were not able to reclaim the widely watched moving average.

It is obvious that bears have inflicted serious technical damage not only price wise but above all breadth and momentum indicators are now firmly negative.

This weekend I will begin the technical update by analyzing Momentum & Breadth Indicators:

RSI has broken the trend line support in force since the August 2011 low and it has also breached the zero line.

Stochastic issued a sell signal on the third week of September and since it lost the 80 line the fall has accelerated. There is no indication that could prevent a move below the 20 line (Oversold zone)

MACD issued a sell signal at the end of October and it is still clearly pointing down.

Conclusion = Negative

Once it breached the 500-support line at the end of October it has dropped with intensity.

Here we have to watch the zero line and the RSI.

The RSI has entered the oversold zone. Usually when price establishes a bottom we should see a positive divergence at least in the RSI so far there is none.

Conclusion = Positive (Only because it is oversold)

Weekly Stochastic of the Summation Index:

It is extremely oversold. Usually when it enters the oversold zone price begins a bottoming process that culminates with a bullish signal cross. Probably beforehand, the Summation index will have to drop below the zero line. A bullish signal cross is expected to allow a multi-week/month rally.

Conclusion = Positive (Only because it is oversold)

NYSE 10 d ma Adv-Dec Volume:

Possibly one of the few breadth indicators left with a positive divergence.

So far declining volume remains muted and oddly well above the oversold zone.

Conclusion = Positive as long as the positive divergence is not aborted.

It has erased the positive divergence and it is still above the -60 line (Oversold zone)

Conclusion = Negative

Daily Momentum Indicators

RSI has erased the positive divergence.

Stochastic last Wednesday has issued a new sell signal and it is now back in the oversold zone.

MACD is moving away from the zero line without any sign of slowing down.

Conclusion = Negative (The oversold Stochastic could allow an oversold bounce)

Therefore the breadth and momentum “picture” remains bearish  friendly so in order to even think about a reversal pattern we have to wait for an improvement of the technical indicators. Maybe the weekly stochastic will have to enter the oversold zone in order to increase the odds of a reversal.

Neither sentiment is helping the bullish case since retail investors have chosen the wrong time to become more aggressive. Keep in mind that this is a contrarian indicator, which usually warns of a potential market bottoming process when the Bull Ratio is at an extreme low reading.

Going forward I will closely monitor a simple risk on risk off indicator made of the ratio SPX vs TLT (20+ year Bond etf).

The chart is self-explanative

As you now I remain a firm believer that price has not established a major top at the September 14 high therefore price has to find a bottom above the June 4 low.

So the question is where SPX can attempt a reversal pattern?

Usually price establishes a bottom at a previous significant resistance transformed into a support.

If we look at the monthly chart below we can see that on Friday price has reached a significant one. If as I expect 1370 will not hold the next one is in the area of 1325.

In the weekly chart we can locate a few additional interesting price levels:

Rising 50 wma = 1363 Significant support & lower BB = 1344

In addition we have the 0.618 retracement of the June – September up leg at 1346.

Since, if my long-term count is correct, price is now unfolding a wave (B) or a wave (II) of a speculative Ending Diagonal (On October 28 I posted an update of the long-term count), then price is still within the standard retracement of both EWP.

As a matter of fact price will have to breach the June lows in order to kill my scenario

Lets move on to the EW interpretation of the current move.

In my opinion the internal structure can only be counted as corrective. Last Thursday I modified the overall count from a Double Zig Zag to a Triple Zig Zag (11 –wave move)

If on Friday price has established a short-term bottom (keep in mind that price has reached a significant support = long term horizontal support + 0.5 retracement of the June-September up leg), in addition we have a daily Doji candlestick and positive divergence of the NYSE Adv-Dec Volume:

Then within the TZZ pattern we could have two options:

1. Price is involved in unfolding the final wave (C) of (Z).

Since the down leg off the November 6 peak is only a 3 –wave move then this option would require an Ending Diagonal.

A Wave (II) could reach the 0.618 retracement at 1410 (At 1408 we have the 10 dma)

2. From the November 6 peak price is unfolding the third Zig Zag.

If this count is correct then last Friday price could have established the bottom of the wave (A). The wave (B) could top in the range 1396 – 1410, while the following wave (C) down could reach the 1340 area.

I cannot leave out in this weekly technical update NDX, which currently presents a bearish looking chart.

Regarding the long term EWP (From the November 2008 low) I have been working with a similar corrective count as for SPX, which calls for a Triple Zig Zag.

Here we could also have two options:

Price with a TZZ is unfolding the wave (A) of the third Zig Zag, therefore now price is tracing the wave (B); (Blue count) Price with a speculative Ending Diagonal should complete the last wave (C) of (Z), therefore now price is unfolding the wave (II); (Black count)

Since price has breached the 0.618 retracement of the June – September up leg and it has ended the week below the 50 wma, the lower BB and the trend line support in force since the March 09 lows are the last potential reversal zones left above the June lows which is 5.4% below Friday´s eod print.

Today I am adding a third EWP option that calls for a Triangle wave (B).

Despite the oversized selloff, the internal structure of the move off the September 21 high to date, maintains a corrective 7-wave down leg hence the odds that price has not established a major top are large.

So far price could be unfolding a Double Zig Zag

Lets see how far can the USD index rise within a clear corrective pattern that could still unfold the right shoulder of large H&S bearish pattern.

It is not necessary to remind that once the corrective rebound of the USD Index is over the Equity indices are expected to resume the intermediate uptrend.

There is something strange in the behavior of VIX. Despite the technical damage inflicted to the major equity indices VIX has not established a higher high. This positive divergence for the equity market could allow a larger bounce next week.

Anyway as I mentioned last Friday:

“But the internal structure, despite yesterday´s bearish Harami is still suggesting that we have not seen yet the top. Hence as long as VIX does not breach the pivot support at 17, I expect a move above the October 23 peak at 19.65 that should occur with a negative divergence of the RSI.

If VIX has more business to the upside we already know that SPX has more business to the down side.

Usually when/if a daily VIX candlestick is above the upper Bollinger Band we will have a serious warning that SPX (Proxy for equity indices) should be establishing THE BOTTOM.”

The major events next week are:

Monday the Bond market is closed (Veteran Day) Tuesday: Retail Sales and FOMC minutes Friday: Monthly OPEX

Maybe if Bulls get a catalyst the correction could be over by Thanksgiving (November 22)