WEEKLY ANALYSIS 0505
BULLS HAVE REGAINED THE CONTROL
After four consecutive failed attempts of breaking above the April 11 peak at 1597 (Probably on Friday there were trillions of short stops above 1600), with a better than expected NFP, SPX carried out a break out smashing the previous high. The majority of the daily gain was achieved during the first 5 min bar (Short squeeze)
The weekly candlestick, a white long line, “per se” suggests a solid break out. Usually the next weekly bar should be a small range body.
In the weekly time frame we have three key numbers to watch:
- Next resistance = Upper Bollinger Band = 1627 +/-
- Support: 1597.35
- Trend Reversal = eow print below the 10 w ma = 1565
The advance form the November lows is mature but the absence of an impulsive sequence form the last reaction low on April 18 suggests that the “persistence” trend still favours the bulls.
Besides the EW count, as the result of the Bears failure to achieve a reversal at the April 18 lower low bulls can count on:
- Higher highs/lows.
- Price is above both the 10d ma & 20d ma
- The 10 dma is back above the 20 dma
- The slope of both moving averages is positive.
Therefore as long as price does not breach at least the 10 dma and the following up leg does not establish a lower high, bulls remain in control.
But since usually price does not go up in a straight-line, Friday´s eod print above the upper Bollinger Band raises the odds of a pullback. (Probably only a retracement of the last up leg from last Monday´s lod)
Going forward the upper trend line of the channel may be a short-term reversal area. Next Monday the trend line will stand at 1628.36 +/- (It raises 1.77 points x day)
Regarding the longer term “picture” I maintain my view that the advance from the November lows will not establish a major top therefore once this “mature” up leg is over I expect a large pullback which will eventually be bought in the range 1485 – Rising 200 dma = 1464
Two other reasons support a pullback next Monday:
1. SPY ended the day with a “bearish” Spinning Top. If a pullback is underway I am considering two options:
a) Price does not close Friday´s gap in which case one more up leg should complete the up leg form the April 18 low but not the advance from the November lows.
b) If Friday´s gap is closed then I expect only a larger pullback which should not breach the 20 d ma = 157.68 (The advance form the November lows will not jeopardized)
Both options should have a bullish outcome.
2. NDX entire body of Friday´s candlestick above the upper Bollinger Band + a potential exhaustion gap. This is an indication of excess of confidence of the bulls by extending this move beyond the usual limits of “gravity”. Therefore if my overall count of the advance from the November lows is correct (I have been suggesting this count for SPX as well), Friday´s gap at 2911.14 (If closed or just filled) will determine which of the two short term scenario discussed above for SPY will apply.
Why I expect more upside regardless of the size of the expected pullback? (Provided the internal structure remains corrective)
1. The Internal structure of the advance form the November lows can be counted:
a) Option 1: Triple Zig Zag ===> From the April 18 low price has to unfold the last Zig Zag.
b) Option 2: Double Zig Zag ===> Since the last up leg from the April 18 low is not impulsive, if price is unfolding a DZZ then the last wave (Y) has to form an Ending Diagonal
2. Breadth has improved substantially since the April 18 low. I have been suggesting that usually when the Summation Index issues a buy signal with an oversold RSI, the next sell signal should occur once the RSI enters the overbought zone (Above the 70 line), besides the RSI usually remains overbought for some time allowing a distribution phase before rolling down.
3. AAII Bull Ratio is too low
4. There is no fear. Usually in a bearish environment for the equity bulls, Bonds should outperform SPX. This is not the case since the “appetite” for bonds has been abruptly reversed on April 15.
In addition as I have suggested in my last weekly update that the Bund could have completed a bearish rising wedge. This pattern suggests a likely sell off that would favour a bullish outcome for the equity markets.
5. VIX is diverging from SPX. This is probably the only serious warning for the equity bulls but despite on Friday the “fear index” has not breached the trend line support in force since the March 14 low and ended the day with a doji, the down leg from the bearish flag seems too shallow and the Stochastic has not entered yet the oversold territory. Therefore as long as the sequence of lower lows/highs is maintained I would not rule out at least another lower low (Retest of the April 12 low).
If next Monday a bounce materialize I will be watching if the 20 dma holds.
Last week I gave too much significance to the McClellan sell signal which obviously has not been accurate in anticipating the end of the up leg off the April 18 reaction low. Hence going forward instead of watching the Stochastic, which remains with a sell signal in force, I will pay attention to the pattern. Maybe we have a wedging formation in progress. So if in the next pullback the Oscillator breaches its trend line and establishes a lower low (Below 10.93) then probably the SPX up leg from the April 18 low will be over.
In order to expect a meaningful decline the McClellan Oscillator has to breach the zero line
Regarding the EW labelling of the current up leg (From the April 18 low):
As I have discussed several times in the daily updates this up leg is not impulsive therefore it should be unfolding a complex Double Zig Zag. Once this EWP is over we should have the top of the wave (A) of the Option 1 or the wave (I) of an Ending Diagonal of the Option 2 discussed above.
At the moment I will be working with the Option 1
If on April 30 price completed an Ending Diagonal then it should be the wave (W). The two prevalent extension targets for the wave (Y) are 1x 0.618 = 1619 and 1 x 1 = 1643
Since from the May 1 to Friday´s hod we have a 3 –wave up leg we should have two options:
- Blue count = Price has completed the wave (A) of the last Zig Zag provided the pullback (assumed wave B) does not breach Friday´s opening price at 1597.60 (Recall that SPY Friday´s gap should not be closed). If this is the case the next up leg will complete the Double Zig Zag establishing the high of the wave (A) of the Option 1 (Triple Zig Zag ===> From the April 18 low price has to unfold the last Zig Zag). Once the wave (A) is in place a large pullback which will retrace a Fibo # of the wave (A) and it will be followed by the last wave (Z) up that will complete the EWP from the November lows.
- Red Count: Price has completed the wave (A) of the Option 1 (Triple Zig Zag ===> From the April 18 low price has to unfold the last Zig Zag). If this is the case a large pullback wave (B) will retrace a Fibo # of the previous wave (A). Once the wave (B) is in place the last wave (Z) up will complete the EWP from the November lows.
The above explanation is a bit confusing so to make it simple ==> If from the November lows price is unfolding a Triple Zig Zag then from the April 18 low price has to unfold a Zig Zag.