The S&P 500 gapped higher from channel support at the start of the week. Prices reached the key Fib. retracement area a few days later, before a sharp sell-off resulted in a downside breakout from the price channel.
If the sell-off continues in the next few days, there will be increased evidence of a wave 3 impulse underway to the downside.
But the market situation at this point and the current look of the pattern from the August high, would also put a wave c (as part of an a-b-c correction from the August peak) high on the list of possible scenarios.
The reasoning is that a wave c in a typical a-b-c correction is often equal to wave a in terms of price length, as can be seen now.
A zoomed in version of the price action this week can be seen on the S&P 500 hourly chart, with the finer degree wave labeling included.
A look at the daily DGL (Dynamic Gann Level) chart, shows a good example of how helpful these lines can be in finding potential support/resistance zones.
The same goes for the NYSE Summation Index daily based trend indicator, with it’s ability to often catch good chuncks of trends, as seen in this case.
Volatility – VIX daily once again pushed through trendline resistance late in the week, then made a pull-back and closed Friday at this line, which should now be strong support instead.
As for the OEX weekly chart, with just one more lower close, there will be a clear break below important trendline support, which could open up for even more weakness, mid term.
The S&P 500 made an upside breakout from the Triangle mentioned in the previous update. This sharp intra-day move reached the channel resistance area, before sellers came in and forced prices near the low of the day’s range.
The outcome of this price action was a Pin bar (Shooting Star candlestick) which often warns about market reversals, especially when it shows up near important resistance areas.
The sharp sell-off thereafter brought prices down for a test of channel support, which resulted in an RSI-2 oversold extreme. When RSI-2 dips below 10, there is over a 70% chance the market will close above it’s 5 day EMA within a week.
So because of this, odds are good the market is heading higher in the next few days, towards the first Fib. retracement zone at a minimum, as drawn on the hourly chart.
This area (2460) also represents the low of the Triangle, which should now act as resistance instead.
From an Elliott Wave point of view, either a wave 1 or c (as part of an a-b-c Expanded Flat scenario from the July high) completed at the daily channel support, with the finer degree labeling shown on the hourly chart.
If this was a wave 1 from the August high, then i’m looking for an a-b-c wave 2 advance, which should terminate below the July high, ideally at the 50% or key 61.8% retracement level.
The a-b-c Expanded Flat alternate scenario from the July high, on the other hand, could once again lead to higher highs.
The fear this sell-off created was substantial, with Volatility – VIX daily exploding from decade long support and it blasted through trendline resistance, which should now give strong support instead.
Weekly momentum has just left it’s overbought territory, with prices yet to close below trendline support. Volume was below average for the week, reflecting a lack of institutional participation in this sell-off.
I’ve updated monthly charts, with some comments available.
Long term, from a Murrey Math point of view, with the 7/8th MML Pivot high taken out, the S&P 500 could in fact be targeting the major 8/8 MML (Murrey Math Line) up at 2500.
Even a ‘throwover’ of this area is not ruled out, before the tide could be turning at some point this Fall, which is a seasonally weak part of the year for the markets. Significant reversals have often been the outcome in the past, when the market reached these strong 4/8th or 8/8th MML’s.
The 2500 resistance area also roughly represents the earlier mentioned major L3 DGL, with long term momentum still holding on to it’s bearish mode, despite the ongoing price advance.
Short term, as the S&P 500 hourly chart shows, a contracting Triangle is probably forming. So the directional breakout from it should give a clue as to where this market is heading next, when this pattern is completed.
An upside breakout could mean another test of daily channel resistance coming, while a downside breakout could mean weakness towards channel support.
Weekly momentum has once again entered it’s overbought territory and seems to prepare for a reversal, while in a bearish divergence condition vs. the new highs in prices, which are now testing weekly trendline resistance. So at least a mid term pullback is likely soon.