WHAT ELSE CAN I SAY?

Now it is obvious that the reason that is preventing a pullback is Friday´s quarterly Opex and if you still expect a pullback ahead of next Wednesday FOMC meeting you better take a few days off (This is what I will probably do).

The short-term breadth sells signals remain in place. Yesterday I showed you the sell signal issued

BULLS NOW NEED AN IMPROVEMENT OF BREADTH INDICATORS

The answer to my last weekend update´s title is: Friday´s hammer has been the prevailing candlestick.

So the potential reversal pattern I suggested on Sunday has been aborted, thus the scenario that was calling for a completed corrective up leg from the November lows is now grasping at straws.

Moreover in the case of the Dow it is now unquestionable that price has not completed yet the corrective up leg at the February 19 high with an initially thought Double Zig Zag instead, as I suggested on Sunday (This was not my preferred scenario), the EWP seems it will extend higher with a Triple Zig Zag.

If this is the case then from the February 25 lod price will unfold another Zig Zag higher (Now we are in the wave A )

Bears have failed but now bulls badly need an improvement of the breadth indicators in order to propel the market (SPX & DOW) higher, probably as suggested, with another Zig Zag up.

Therefore going forward the McClellan oscillator is probably the best gauge that will dictate over the sustainability of this incipient likely new up leg.

Why?

Because if the McClellan Oscillator turns positive it will most likely allow the Summation Index to issue a new buy signal that will propel the equity market to new highs.

So for the time being the Summation Index  has the sell signal switched on:

But if the McClellan Oscillator gains traction above the zero line then it will only be a matter of time before the Summation Index triggers the buy signal:

Regarding the immediate time frame (Next few days) the Stochastic, which is overbought, could trigger a short-term pullback.

Therefore if SPX is going to adhere with the suggested pattern of the DOW, from last Tuesday´s lod price should be unfolding the wave (A) of the “last” Zig Zag up. Hence going forward, barring a Triangle, as long as the last higher low at 1501.48 is not breached I have to consider that now the probability of achieving higher prices is larger than the probability of a reversal.

Regarding the short-term price action, the internal structure of the current up leg (From last Tuesday lod) is unquestionably corrective, which is in agreement with the suggested wave (A).

So far, in my opinion, the pattern suggests that price is unfolding a Double Zig Zag, therefore the key segment of this pattern is the assumed Zig Zag in progress from last Friday´s lod.

So we have two potential equality extension targets for the assumed wave (A):

• Zig Zag from last Friday´s lod: (C) = (A) = 1530.80
• Double Zig Zag from last Tuesday´s lod = 1541,81

The immediate pivot support is at 1512.29

Going forward I am going to watch:

• If VIX will show a divergence with SPX (A new higher high of SPX and a higher low of VIX) in order to gauge the sustainability of SPX higher highs.

• TLT, since so far the pattern is not aligned with the SPX resumption of the up trend off the November lows.

Regarding the preferred SPX long-term count, the assumed bearish wave (X) in progress, remains unchanged but the option of the Ending Diagonal is now in quarantine until we have a confirmation that the  up leg from the November lows is over.

TREND REVERSAL

Let´s begin today´s update with the DOW, because I think it will set the “pace” and define the EWP of the correction for the following reason.

• Yesterday’s higher high kills a potential impulsive decline from last Wednesday’s high, therefore I already assume that price will unfold a Zig Zag / Double ZZ or Triple ZZ.

Yesterday I mentioned that the tight Bollinger Bands were auspicating an imminent large move and that if/once a lower low was established there is nothing in the chart (Absence of supports) that can prevent a drop towards the next critical support located at the September peak = 13653.24

• How long will the correction last?

Probably a bottom could be established either during Quarterly Opex week (March 15) or more likely in the next FOMC (March 20), which will also include a press conference by Bernanke.

I am expecting a potential bottom in the range of the of the 0.382 – 0.5 retracement of the November-February up leg with an eye at the rising 20 wma which today stands at 1448. Below in the SPX weekly chart, which I posted this weekend, I have highlighted the assumed target box of this correction:

Let me now show you the internal structure of the decline of the DOW.

• The higher high is already suggesting that price will not unfold an impulsive decline. Instead a ZZ-DZZ-TZZ should be expected.

• The internal structure of yesterday´s decline is neither impulsive therefore considering that we are in the initial stages of a potential meaningful correction (Patterns can morph), so far the overlapping internals are suggesting that price could be forming a bullish falling wedge (Now we would be in the wave 1 of the ED).

• Where can this first down leg bottom? Since it is corrective then when we need to  see either a 7 or 11 – wave move. (Now we have 7 w)

In the case of SPX, maintaining the same criteria set by the DOW, I will consider that yesterday´s hod is a wave (B) belonging to a corrective EWP.

Here we could make the case that price is unfolding an impulsive wave (C) down, either we almost have the wave (3) or the wave (3) is extending in which case price is now in the wave (I) of (3)

Conclusion: The trend reversal is confirmed but it is not going to be a “bed of roses”. It looks like price will unfold a complex corrective pattern.

Regarding the SPX potential path, as already discussed, in my opinion, price has completed with a DZZ the November-February up leg. Now I am anxiously waiting for the confirmation that price is involved in forming the Ending Diagonal option of my preferred long term count by breaking down through the September high at 1474.51

If this is the case the target box of the assumed wave (IV) ed is located in the range 1459 – 1437

At yesterday eod we already have extreme bullish readings (The market is already short-term oversold):

-       Eod print below the Bollinger Band

-       NYSE TRIN eod print at 2.86

-       NYSE TICK eod print at -843

Therefore odds are favouring a bounce attempt either today or tomorrow. Keep in mind that today Bernanke will address the House of Rep. hence if he wants he may induce a short covering bounce.

In the technical front:

• Lets monitor the McClellan Oscillator since it gives reliable clues. Here I want to highlight two issues:
  • Every time it drops below the BB usually an equity rebound occurs (same day or next day)
  • But I don´t expect a major bounce or a bottom as long as the Stochastic enters the oversold zone and it issues a bullish cross.

• Momentum indicators are endorsing the scenario of a “large” pullback. RSI has breached the 50 line while the Stochastic is approaching the oversold zone (Hitting oversold territory does not mean the correction will be over but the odds of a rebound will increase)

Lastly VIX yesterday was the major news of the day by jumping 34%. This is not suggesting the buy the dip stuff. Instead this feels like panic is creeping in.

The January 2 gap has been closed (Now there is only “white space” until the December 28 peak at 23.20)

This one-day move is clearly overextended, but I don´t expect a major retracement as long as it remains above the 200 dma and its RSI above the 50 line.

NEXT WEEK ALL EYES ARE ON THE EUR AND THE DOW

Despite all the reasons I have discussed lately without a lower high there will not be a guaranteed  trend reversal.

Bears have the opportunity to inflict technical damage if they are able to take advantage of a potential impulsive decline from last Wednesday´s peak, in which case price would be involved in unfolding a large 5-wave down leg (The current bounce would be the wave 2).

But even if last week´s down leg was not impulsive the overlapping internal structure of the current bounce still suggests that price from last Wednesday´s top has began a corrective pattern that should unfold a Zig Zag / Double Zig Zag / Triple Zig Zag (The current bounce would be the wave B).

Usually a counter trend bounce (wave 2 or B) stalls in the range of the 0.382-0.618 retracement of the previous down leg. But in a “strong” uptrend, the 0.786 retracement can come into play. The difference between a wave (2) and a wave (B) is that the former cannot move beyond the starting point of the wave (1), while a wave (B) can even top beyond the beginning of the wave (A).

As a general rule of thumb above the 0.786 retracement instead of a large impulsive decline a corrective option could become the most likely scenario.

Below in the SPX 15 min chart we can see that the internal structure of the current rebound is suggesting a 7-wave up leg (Double Zig Zag). If this count is correct the projected extension target (1×1) for the wave (Y) is at 1519.40

If the wave (Y) extends higher or the pattern morph into a more complex one the 0.786 retracement or the trend line of the assumed completed Ending Diagonal should deter a revisit of the previous high.

Next Mondays “all eyes” will be watching the Dow since last Friday it closed at only at 57.70 points below the previous high.

Friday´s candlestick is a white Marubozu, which is suggesting that a top is not in place yet. A white Marubozu is usually followed by a small range body, hence probably by the eod will have clues regarding the potential trend reversal. In the case of the DOW we can see that the Bollinger Bands are narrowing hence a large move should be expected.

If price confirms the trend reversal by breaking below last Thursday´s low then there is only “white space” until the September´s peak at 13653.24, hence I expect a quick drop towards this area.

Another major reason that favours the bears is that it would be extremely rare that last week rally of the VIX were only one up legged move. So odds favour the establishment of a higher low, which should be followed by at least one more up leg that should reach the range 16.89 (200 dma) – 18.02 (January 2 gap down)

Therefore next Monday equity bears need a reversal preferably no lower than the 20 d ma = 13.35

Equity Bull´s wild card is a major rally of the EUR next Monday.

Even though EW wise it is possible since from the February 2 peak we can count a 7-wave down leg (Maybe if price completes a potential small wedge during the Asian session).

A 7-wave down leg can be counted as a finished Double Zig Zag, which could open the door to a large rebound. But on the other hand the confusion surrounding the results of the Italian elections reduces the probability of this scenario (Polls will close tomorrow at 14:00 cet).  Hence even though a bounce is possible maybe the DZZ could morph into a TZZ.

In addition, as discussed last week, price could have formed a H&S pattern with a target at 1.2885

Even if the overall pattern form the February high is corrective I doubt that price is establishing a major bottom.

Anyhow the EUR pattern and the reaction to the Italian elections can become the major hinder for the equity bears aspirations.

Lets move on to review the SPX charts, where I maintain both the short-term and long-term scenarios.

Last week´s Ending Diagonal, once/if a lower high is in place, will have completed with a double Zig Zag the up leg off the November lows.

If price in the coming weeks breaches the September peak then last week´s high should be the wave (III) of the Ending Diagonal option.

If this is the case the wave (IV) should bottom in the range 1459-1437

In the weekly chart below I show you the Ending Diagonal scenario:

Since the October lows SPX has had 2 major pullbacks, the first one, from the April´s high, price retraced almost to the 0.5 Fibo.; the second one, from the September´s high, price retraced lower than the 0.618 Fibo. Lets see if the third one reaches the range located in the range of the 0.382-0.5 Fibo.

If the Ending Diagonal pans out then, EW wise, the Double Zig Zag wave (X) off the November 2008 low will be completed hence it can open the door to a major decline with the wave (A) of the second Zig Zag From the 2000 top.

Regarding the technical front:

• The Summation Index has issued a weekly sell signal. Usually the next buy signal should occur when the stochastic drops to the oversold zone:

• The McClellan Oscillator keeps establishing lower Highs/Lows. Therefore if the current equity bounce is expected to fail below last Wednesday´s high the oscillator must not breach its last lower high at 7.74

• Daily momentum indicators are aligned with the scenario of a larger pullback. If this is the case the stochastic must not cancel the bearish cross issued last Tuesday while the RSI will have to break down the 50 line during the expected SPX wave (3) or (C).