Last week´s powerful rally has established a most likely bottom at the June 16 low = 1258.07 after SPX had 2 successful ( for the bulls) tests at the 200 dsma.

This unexpected explosion higher has moved s/t momentum and breadth indicators into extreme overbought readings (McClellan oscillator) while longer term ones like the Summation Index have triggered intermediate time frame buy signals ( we have a weekly Summation index buy signal in place)

Therefore it is reasonable to expect :

a) In the short term time frame : a pull back
It would be unusual to see price maintain the s/t trend up without a correction, keep in mind that price a closed 2 consecutive days above the BB

b) In the medium time frame: an attempt to re-establish the intermediate time frame trend up. It would mean that the corrective pattern that begun at the February peak is over.

Long term time frame pattern

Below I have my “road map” which calls for a Triple ZZ in progress off the November 2009 low (blue count).

This is my primary count.

As an alt count price could be shaping a larger ABC or ABCXABC (black count)


 

Short term time frame pattern

Everything has been corrective since the February peak.
We had two 3 -wave down legs and one 3 -wave up leg.

The current rebound from the June 16 low is atm also a 3 – wave move.

Therefore Elliot Wave wise I have to find the most likely bullish pattern that should allow to reinstate the intermediate trend up.

We have a bunch of 3 waves the logical pattern should be a Triangle.
If this is the correct pattern then price has to establish the top of the wave (D) soon and afterwards retrace at least the 0.5-0.618 of this up leg (in a strong market sometimes the wave (E) of a triangle does not bottom at the lower rising trend line).

The question is if the 50 dsma = 1317 will be breached.

What other bullish potential pattern do we have ?

1. Price has begun a LD wave (I). It would repeat the same pattern like on July 2010.
Since it is just a speculative idea atm I don´t consider it.

2. Price is tracing an ED wave (C).
If this is the correct pattern price is involved in the initial stages of the wave (III) of the ED

3. Price is tracing a larger correction from the February peak
If this is the correct pattern price is involved in a Triple ZZ

Therefore we know that price has most likely established a bottom and is involved in resuming the up trend.

But in my opinion, unfortunately, the path that will follow is still undefined.

Hence we have to wait for the pull back which should help to establish the most likely scenario.

Equity sector front:

– XLY (Consumer Discretionary ETF)

This cyclical sector is already challenging the previous highs.
Consider the count below as a guide line (I have matched it with my primary SPX count)
Here the ED idea could be in progress with a wave (iii) up.

– KBE (Bank ETF)

In my opinion it remains the sector that holds the key as its price behaviour should contribute in shaping one the SPX options discussed above.

ATM we have a most likely s/t bottom.
Last week candlestick should allow more follow through to the upside, and price should in the worst case scenario reach at least the range of the 0.382 retracement – 20 wsma with a wave (B)
The alt count could be a large triangle.
It would imply a “huge” rally at least towards the 0.618 retracement for the wave (D)

In the currency front EURCHF will dictate the risk on risk off in the EU sovereign debt saga.
Last week candlestick suggests that this cross is set for a substantial recovery attempt.
Hence the current pull back should establish a higher low.
So even if the current weekly candlestick does look bearish we have to wait for the eow print

There is still a lot of “noise” in the EU debt issues but atm the equity market seems not too worried maybe it is waiting “good news” from the US debt ceiling front.

News are like the fuel for a racing car. It is badly needed in order to keep the upside momentum alive.

On Friday we have NFP then next Monday earning season kicks off

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