User: TWT: WEEKLY TECHNICAL UPDATE: WEEKLY ANALYSIS 0106 | The wave trading

I want to begin this weekend technical analysis with a review of the SPX long-term count. (I will use this discussion to update the long-term SPX count thread)

The main theme, which I have discussed, in my last long-term count update (October 28) remains unchanged: “From the 2000 Top price is unfolding a Double Zig Zag, therefore now price is involved in completing the wave (X). Once the wave (X) is in place price will begin to unfold the second Zig Zag down towards the 2009 lows.”

Therefore I dismiss any bullish scenario that implies a major break out above the 2000 top; instead I maintain the assumption that considers a move back down towards the 2009 lows once the wave (X) is complete.

The wave (X) is by definition a corrective countertrends move hence it has to unfold either a Zig Zag (3-wave) or a Double Zig Zag (7-wave), I am not considering a Triple Zig Zag as a coherent option.

Since so far we can make the case that price has unfolded a 5 –wave overlapping structure it seems reasonable to consider a Double Zig Zag as the most likely count.

Lets review the potential options beginning with a new one which was not discussed in my last long-term count update:

1.  From the monthly chart above we can see that from the October 2011 low price could be unfolding a wedge. In this case then price with an Ending Diagonal would be on the verge of finishing the wave (A) of the second Zig Zag by unfolding from the November low the wave (V) of the Ending Diagonal.

2.  From the June lows price is unfolding with an Ending Diagonal the last wave (Y). If this is the correct count price is now involved is tracing the wave (III) of the assumed Ending Diagonal. This pattern will complete the wave (X) countertrend rally from the 2009 lows.

3.  From the October 2011 low Price with another DZZ is unfolding the wave (A) of the second Zig Zag. Since the internal structure of the up leg off the November low is corrective then this option can only pan out if price from the September high is involved in unfolding a Flat correction. If this is the correct count then price cannot substantially breach the September high.

Since we already have KBE, XLF, NYSE and RUT above their September peaks this option is now less likely.

Lets now move on to the shorter time frame pattern (From the September 14 high)

As I mentioned last Friday in my opinion from the November 16 low price is unfolding a Double Zig Zag which is not complete yet as I believe that price is now involved in the final stages of the wave (A) of the second Zig Zag. Once the assumed wave (A) is in place I expect a shallow pullback wave (B) with a target in the range 1444 – 1430 (20 dma), which will be followed by the last wave (Y) up. If the pending wave (Y) substantially breaches the September high and above all the following pullback is corrective then we will know that the Flat option is no longer valid, instead price should be involved in one of the two Ending Diagonal options discussed above, in such a case price is not expected to breach the 50 d ma = 1412 until one of the two Ending Diagonal options is done (Assuming that the ending patterns are confirmed by the price)

During last Friday´s session I have been wrongly looking for an ending pattern of the current up leg (From the Dec 31 low), instead price had a final hour intraday range break out but since the internal structure is once again clearly corrective in my opinion we have two short-term options:

1.  Ending Diagonal: From 1439.37 price is unfolding an ED hence a shallow wave (IV) pullback will be followed by the last wave (V)

2.  Triple Zig Zag: From the January 3 reaction low price is unfolding the third Zig Zag, hence now price has began the wave (B) pullback

Both options have the same outcome although the latter should allow a temporary break out above the September 14 high.

If the Double Zig Zag count off the November 16 low is correct then a meaningful pullback will have to be postponed  for a while.

In case I am wrong and the second wave (A) from the November 16 low is already in place, then bears have to breach the short-term pivot support located at 1455.53

I hope that this explanation of the short-term EWP is not too confusing.

In addition to the wave count that argues for an imminent shallow pullback (which will not be a substantial one until price completes the EWP from the November 16 low maybe in mid January) we have the following technical reasons:

Three consecutive eod prints above the upper BB Daily Stochastic is overbought + RSI so far has not breached its December 18 peak hence it is showing negative divergence

NYSE Adv-Dec Volume with negative divergence

It is even more striking the negative divergence of the 10 dma of the NYSE Adv-Dec Volume despite last week powerful equity rally.

Lastly I cannot leave out VIX which last week had the biggest weekly drop ever since its inception in 1990.

In the weekly chart below we can make the case that the “fear index” has two potential patterns in play:

During May 2010 – August 2011, VIX established a huge Double Top at 48. Obviously the theoretical target would not be fulfilled but if VIX breaks down the declining trend line support, in the area of 13, in force since the April 2010 low then a move back towards the all time low at 9.38 should not be ruled out A wedge is forming from the March 2012 low, in which case VIX is approaching a major reversal area as the mentioned trend line could be the springboard from where volatility should increase rapidly, although the wedge may not be complete yet.

If we compare the other three times that VIX reversed from the declining trend line support the weekly Stochastic was extremely oversold, this time it different, hence we could make the case that we will have a positive divergence (We will have to check it with the RSI as it is a better indicator) if this is the case then the odds of the wedge scenario would increase.

The following chart has two envelopes the (10,10) = Blue Bands and the (20,20) = Black Bands. It is unusual to see VIX below the lower Blue Band and it is extremely rear to see volatility dropping below the lower Black Band hence it is reasonable to expect a reversal in the range of 13.51 – 13, therefore the risk that SPX is approaching some type of a top should be raising.

Also keep in mind that the Stochastic is now extremely oversold, although VIX will most likely need a multi-week pattern in order to establish the foundation for a major reversal.

Next week the economic agenda is light while the major event is the kick off of fourth quarter 2012 earning season on Tuesday with AA report.