SPX: Follow Up of the Short Term EWP
I MAINTAIN THE CALL OF A SHORT-TERM PAUSE
The month of April ends with a monthly Hanging Man. This is a potential bearish candlestick if SPX begins the new month below 1597.57 while a trend reversal will be confirmed if the month of May ends below 1536.03
I don’t know where SPX will end on May but I in my opinion price has not established yet any meaningful top therefore I would not give much credit to the monthly Hanging Man.
I have discussed many times that with a corrective up leg; EW wise price cannot establish a major top (A terminal EWP has to be either impulsive or unfold an Ending Diagonal).
So far the “persistent” advance from the November lows can be counted as a 9-wave up leg (But not impulsive), therefore it seems reasonable that price could be unfolding a Triple Zig Zag. If this is the case price is now in the late stages of the wave (A) of the third Zig Zag. If this scenario pans out once the wave (A) is in place it will be followed by a corrective wave (B) pullback that should not breach the trend line support in force since the November lows. The wave (B) will be followed by the last wave (Z) up.
Another option could be an Ending Diagonal.
Once this EWP is over I expect a large correction that eventually will be bought again. Probably we could see a move back at the rising 200 dma which today stands at 1460.
In additional usually the top of a 7 months rally requires distribution: ====> Topping Proces.
And maybe a higher AAII Bull ratio:
Besides to my preferred count, which considers not completed the advance from the November lows, the buy signal issued by the Summation Index strengthens this scenario. Usually when a buy signal occurs with an oversold RSI, the next sell signal should occur once the RSI enters the overbought zone (Above the 70 line)
Therefore going forward as long as the Summation index does not breach its 10 dma bears will have a tough environment.
Lets move on to the current EWP.
Yesterday I suggested that due to an overbought McClellan Oscillator the odds are favouring a short-term pullback. Today the Stochastic remains with a sell signal in play.
Usually a sell signal should open the door to al least a multi-day pullback. If the trend remains up it should not breach the zero line.
Maybe if SPX is unfolding the last Zig Zag we should see a negative divergence of the Oscillator in the assumed wave (C) up.
Regarding the EW count of the current up leg (From the April 18 lod):
Considering that it is a mess of overlapping wave hence it is not easy to have a confident count, I have two potential patterns:
- Zig Zag with an Ending Diagonal wave (C), if this is the case we are in the final wave (V). Maybe it could be done today. If this pattern pans out the following pullback could reach its origin = 1563.03
- An extension higher within a Double Zig Zag or a Triple Zig Zag. Below I show a TZZ option:
Lately I have not posted any VIX chart because I don´t “see” a clear pattern. In my opinion it certainly doe not look bullish, despite the fact that it is diverging from SPX ( SPX higher highs vs VIX no lower lows).
For the short-term if it breaches the short trend line (From the April 25 lod) it looks more likely a test of the trend line in force since the March 14 low.
Today we have the FOMC policy update and tomorrow the ECB meeting. Since it is obvious that the major drivers of this rally are Central Bankers any disappointment, without much doubt, will be the catalyst of the expected pullback.
Probably this time it is more important the reaction to Mr Draghi decision on interest rates since equity bulls are betting on an interest rate cut.
I don’t know if tomorrow I will be able to publish the daily update. (If I see anything interesting I will post charts on Twitter/Stocktwits)