Charts & Comment 02/09

s&p 500 daily chart

The sell-off continued this week, on above average Volume readings. The daily NYSE Summation Index trend indicator once again impressed, firmly showing the true trend, despite the big up/down moves in prices.

From the January 26 high to Friday’s low, the S&P 500 plunged 340 points.

To put this in perspective of possible returns in a very short time, if a trader had only 1 In-The-Money Put option contract position open, at let’s say $100 per point, it would have returned $34000 within 2 weeks. That’s how powerful this market retreat has been.

Naturally, Volatility – VIX daily readings  exploded because of the plunging prices, which tested the daily 200 EMA and important trendline support Friday.

However, in my view, i think the dust has settled for now, as the S&P 500 has most likely finished a text book, five wave Impulse structure from the Jan. high, as better seen on this S&P 500 hourly chart.

On the daily chart, this is labeled as Intermediate wave (1). After this week’s five wave termination, i’m looking for a corrective phase next, in the form of an a-b-c zig-zag wave 2 pattern to the upside. A common retracement area for a wave 2 or b is 50-61.8%. So the  2704 & 2742 levels would be likely targets for this rebound.

Any advance beyond the key Fib. resistance area, would start to put pressure on this wave 2 count though. A last wave 5 to new highs scenario would then instead get more attention.

But the wave 2 possibility would still be a valid count until a break of the Jan. high is seen, because according to the Elliott Wave rules, a wave 2 can retrace 100% of wave 1 and still be a valid wave count.

It’s just that it’s not so common to see this occurring in the market, so that’s why the odds of wave 2 scenario would be reduced, if the market moves beyound the key 61.8% Fib. zone (daily closing basis).

A third ranked wave scenario would be a wave A completion at Friday’s low and a wave B is now underway to the upside. This one would have the same target levels as the wave 2 possibility.

In the future, if this turns out to be the correct wave count and we think the wave A was a sharp one, wait until the wave C has completed, as the wave C is always the sharpest one of an A-B-C pattern.

Even more so for the wave 3 scenario, likely starting from the same target area, once the wave 2 has reached it’s ending point.

My technical reasoning for why the market is likely heading higher next week:

  • A completed five wave pattern from the Jan. 26 high is observed.
  • Friday, a Bullish Pin bar (Hammer candlestick) formed at trendline & 200 EMA support, on a Volume spike, reflecting buyers coming to the market
  • S&P 500 RSI-2 daily, is leaving oversold territory and formed a bullish divergence Friday.
  • On the VIX Weekly chart, the RSI-2 is at an overbought extreme, indicating lower Volatility ahead, which should be positive for the stock market in the coming week(s).

The S&P 100 BPI (Bullish Percent Index) daily Sentiment chart

The Neural Net System is Short on the S&P 100 weekly

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Monthly charts are updated.

The S&P 500 monthly, Nasdaq Comp, NYSE Comp. tested major trendline resistance in January. The OEX monthly is also near major trendline resistance. In all cases, RSI-25 is overbought.

Gold monthly came close to the first Fib. resistance in January, before pulling back a bit. RSI-2 is at an overbought extreme, so more pullback likely soon.

Light Crude is underway to it’s first target up around the $70 level, with RSI-2 getting quite overbought.

The XOI – Oil index monthly closed up against it’s key Fib. resistance, with RSI-2 in a very overbought state also here. Maximum upside potential is major old trendlines in both markets, which now acts as a tremendous resistance area instead.

The Bond market is falling, with higher Yields as an opposite result. TLT monthly barely managed to close at major trendline support. One more lower close and a downside breakout would be a fact, with more weakness likely thereafter.

The Dollar weakness continues, a test of major trendline support is likely in February.

Short term, as forewarned by the bearish divergence in the daily NYSE Summation Index trend indicator,  the S&P 500 broke out sharply from the daily bullish channel this week, confirming the end of wave 3 from the Fall 2016 low.

The overall Volume readings throughout the week were above average, reflecting institutional involvement in this sell-off.

Friday, the Dow had it’s worst 1 day sell-off in 10 years, plunging 665.75 points.

The S&P 500 daily closed at trendline support Friday, with RSI-2 reaching an oversold extreme reading not seen in a long time. So odds are good a reaction up from this support area can be the next event, early next week. Either in the form of a brief breather to the upside, towards minor trendline resistance, before the sell-off may resume.

Or if a daily reversal candlestick like a Hammer, Bullish Engulfing (‘Railroad Track’ pattern) or Doji forms at this support, a fully completed corrective pattern is also a likely scenario.

With this in mind, let’s zoom into the finer degree wave development by taking a look at the  S&P 500 hourly chart. It shows a text book a-b-c zig-zag correction from the recent January high, possibly finishing a one degree higher wave 4, indicating new highs ahead, in the last wave 5. This is the preferred wave scenario at this point.

However, if bearish forces pushes prices below this trendline support, (daily closing basis) the alternate wave count would start to get more attention, as the chances of a wave 3 underway, (instead of a wave c) would be greater.

This because the a-c part of a typical a-b-c corrective pattern tend to be more or less equal in length, like observed now. If wave c extends more than Fib. 161.8% of wave a, then we’re likely dealing with a wave 3 impulse instead. Which could also mean a full wave 5 structure from the early 2016 low, actually ended at the recent January high.

More evidence of this would come to the surface, when/if OEX weekly trendline support fails to hold in the coming weeks.



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