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Last Friday I suggested that price was involved in unfolding a terminal pattern: “Maybe price is unfolding a Triangle that should establish a bottom with the last thrust down, who knows if at the 0.618 retracement the PPT will step in.”
Instead of a Triangle price traced an Ending Diagonal, some good news came form Washington and price after testing the 0.618 retracement reversed to the upside, leaving in the daily chart a bullish hammer.
Therefore the wave structure off the November 6 peak is most likely over. This down leg, if my preferred count is correct, is the wave (A) of the last Zig Zag from the September 14 high. Therefore I am expecting a multi-day bounce followed by a lower low that should complete the corrective EWP (Recall that I am working with a Triple Zig Zag) from the September 14 high with positive divergences.
The internal structure of this bounce at the moment suggests that price may unfold a Double Zig Zag, in which case the common extension targets are:
1 x 1
= 1369
1 x 1.618
= 1380
A counter trend bounce always entails risks since the EWP can easily morph into something else, so next Monday I would like to see follow through to the upside or at least price should not breach the initial higher low at 1351.06.
In order to keep the ball running to the upside, bulls need price above the 50 wma = 1366.85 by next Friday, theoretically it looks like an easy task.
Therefore the extreme oversold readings of breadth & momentum Indicators + logical level for a short-term bottom (0.618 Retracement) + reversal pattern are the “ingredients” that should allow a multi-day rebound.
In the daily chart below I highlight the target box for the assumed wave (B) countertrend bounce with a range 1382 – 1402.
A weak bounce should fail at the 200 dma while a strong one will go deeper inside the box and two trend lines resistance could come into play.
So the good news for the short-term bullish case is that there are enough technical reasons that auspicate a larger rebound.
But the negatives are still more overwhelming, since in addition to an incomplete EWP there is no sign of a major bottom from breadth-momentum indicator, VIX and sentiment.
Bulls also have the bullish seasonality of a shorter Thanksgiving week, while volume is expected to shrink.
In any case we know the two potential catalyst that are needed for the resumption of the intermediate up trend:
US political agreement of the “Fiscal Cliff”
Spanish Bailout
In addition since the Operation Twist ends in December, the next FOMC meeting on December 12 will be a major risk event and could be another detonator for a Major Bottom of the equity market.
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I clearly Updated on last Thursday in read line : “I will suggest to buy Nifty 5572-5606”
On Friday, the Democrats and Republicans made a joint and civil statement to the press following a brief meeting on the fiscal cliff. It signaled to the markets they are trying to begin this round of talks in a more professional manner, which was not the case in 2011. Therefore, something changed today…it was a step in the right direction. After the rare show of political civility, the tone of the markets improved immediately. The S&P 500 rallied to close 16 points off the session low.
Charts Mixed, But Improved
Since warning of slowing stock momentum on September 24, we have seen little to get us interested again in stocks. Friday was better. On the charts, let’s start with the good news; the S&P 500 found buyers at a logical level (see green arrow below).
A Rally…Then A Lower Low?
Based on numerous factors, we can envision a countertrend rally back toward the 1388-1448 range on the S&P 500. A similar A-B-C rally took place in May 2012. The rally began at point A, moved to point B, and then made a lower low at point C (see below). Markets often have symmetry and a move toward point B on the right is certainly one possible scenario for the next week or so. Keep in mind, point C would represent a low lower than Friday’s low of 1359. A good next step is to clear resistance near the pink line below, which sits at 1362 on the S&P 500.
Resistance Still Overhead
Another scenario is the S&P 500 holding below the downward-sloping trendline from the April and May highs (see red arrows). Stocks broke above the same trendline in August (see breakout below). Now the trendline may act as resistance; it sits near 1370 on the S&P 500.
Not Just Cliff…Europe Still A Problem
The biggest obstacle to a rally may be Europe. There is talk of another round of “haircuts” for holders of Greek debt, which sides with the “risk-off” camp. The German DAX is clearly in a downtrend and has broken some key support levels (see orange arrow).
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our trading range screen for the 30 stocks that make up the Dow Jones Industrial Average. (Please view the description below the screen to learn how we calculate overbought and oversold levels.)
As shown, a whopping 23 of the 30 Dow stocks are now in oversold territory. The most oversold stocks in the index are Chevron (CVX), Disney (DIS), United Health (UNH), Microsoft (MSFT), Procter & Gamble (PG), Wal-Mart (WMT) and Exxon Mobil (WMT). Only three Dow stocks are above their 50-day moving averages — Boeing (BA), Bank of America (BAC) and Home Depot (HD). Home Depot is actually in overbought territory after doing well yesterday.
With the Dow now up less than 4% year to date, more and more of the names in the index are moving into the red for the year. There are now 10 Dow stocks that are down year to date, with Hewlett Packard (HPQ) down by far the most at -48.63%. Intel (INTC) is down the second most at -16.45%, while McDonald’s (MCD) has the third biggest declines at -15.02%. On the bright side, Bank of America (BAC) is still up 66% year to date, but at just $9.24/share, it has the second lowest weighting in the Dow behind Alcoa (AA).
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