This week’s bar looks bad, so far, and looking at the short term charts there is a good chance it will remain that way. If it does, this week’s candle with the previous two bear bars would confirm the kick-start of the larger degree reversal, following the a completion of the diagonal pattern. The new trend does not seem to be very dangerous just yet, but please note the scarce number of occasions that you have seen three back-to-back weekly bars with bear bodies. This is the third time in three years, and, what is more important, the first time since the diagonal departed. At this stage the evidence allows as to think that the Primary degree correction we discussed two weeks ago is on the way. It is worth to take a look at the chart again if you have not done so – link to the monthly SPX chart analysis.
And here is the substance of the commentary:
“To demonstrate the proportions of the impending correction, I copied the territory that has been seized by Wave 2 in circle back in 2010-2011. We are expecting a move against the trend that is similar in magnitude… Due to the large degree cycle top it is a “take profit and buy back later” size pattern, even with a risk tolerant investment approach.” – June 22, 2015
What else is happening short term, besides the break from the ending diagonal? Bulls had no answer to the June 29 large bear trend bar. We have seen two breakout attempts retracing only 38.2% of the last move from the lower high top. Both of them were strong but stopped and reversed sharp when they hit an invisible wall at around SPX 2.085. The lack of follow through implies a lack of conviction from the bulls’ side. They close their positions at the resistance as they agree on lower prices and expect better buying opportunities in the future.
Short term – based on the 60 minute chart – Elliott’s flat pattern (wave ii in circle) describes the best the last 6 days’ price action. A smaller crash type day is possible as the structure stands now.
The most important point, however, is that while one could make a case that the upward ending diagonal is still on, the momentum profile suggests otherwise. The rate of price change and the volatility decreases from left to right within a wedging diagonal. The possible three weekly bear trend bars in a row does not fit the picture as they suggest an increasing momentum and as such the end of the ending diagonal pattern. The reason that’s important, is that now the market can become a “sell the rally,” rather than a “buy the dip” type of market.
The time zone we reference on our charts is Pacific Standard Time. Therefore, the U.S. cash market opens at 6:30 AM PST and closes at 1:00 PM PST.