Last week we showed the possible nested 1st and 2nd waves on the DOW as a strong possibility because the S&P500 was unable to break below it’s August 2148 low. We had to wait till Friday to finally get that break lower (remember the market is all about possibilities, not certainties). Friday made in fact our lives easier as we can now eliminate several possible Elliot Wave counts and can continue to work with our preferred ET count as shown in Figure 1 instead.
Since our ideal SPX2190-2195 target zone was reached we’ve informed our members, “Our ideal target zone for the correction is SPX2146-2069, which is a rather large price zone and purely based on ideal Fib-retracement levels for a 2nd wave, but since we don’t have enough price-data yet for this correction it’s what we have to content us with. A break below SPX2148 should target SPX2117.”
With Friday’s price action we can now narrow that target to SPX2120-2100, as that’s strong support. SPX2117 falls perfectly within this zone, aligns with Fib-extensions and so does the 38.2% retrace of the 5-wave move from SPX1992 (known as the BREXIT low) to the SPX2194 high. If 2100 fails, then 2092 is next.
Figure 1: S&P500 Daily chart with downside target zone
More importantly, price dropped very far below its lower Bollinger Band, and a red day on Monday (open and close entirely outside the lower BB) is often the sign for a strong reversal the next day. Although we think the odds of a deeper and longer lasting correction are still low at this point, we will monitor the (strength of the) price action to see if it’s only a strong corrective bounce to likely SPX2150-2160 followed by a marginal (this market loves double bottoms) lower low. Longer term we still anticipate higher prices. See here.
Talking about strength; to better differentiate between a corrective bounce vs new highs rally we can assess market breadth. The McClellan Oscillator of the S&P500 (SPXMO) closed below its lower BB as well and inside our “buyable bottom zone” (See Figure 2) . A close back above that BB is often a good buy signal. An even better buy signal would be a 2nd consecutive close below its BB -ideally in our “buy zone” as such a setup is often followed by a (very) strong up day. This would coincide well with the aformentioned price set up in the S&P500.
Figure 2: SPXMO gunning for buy zone levels
Last but not least, the VIX had the largest 1-day percent increase (40%) since the August correction (46%) in 2015. During the BREXIT correction the VIX increased at the most 37% in 1 day. Hence, is the VIX getting ahead of itself?
Figure 3: VIX increased the most since August 2015.
In addition, extreme readings like these have let to new highs in the markets, and especially this bull sooner or later. Moreover, the VIX now closed firmly outside its upper BB thus again setting up for a perfect “sell the VIX, buy the SPX signal”: close back inside its upper BB. Two consecutive closes above $15 and ideally its 200d SMA will most likely signal a bottom is in place.
BOTTOMLINE: The VIX, the SPXMO, and actual market prices are all three aligning for “a bottom is imminent” setup. This is a rather unique and therefore possible strong alignment and setup that –when all three respective buy signals fire- will mean a strong bottom is in place.
Re-posted, in part, from our September 10 weekly digest, available to premium members only. Please click here to become a premium member too so you get all this info and more first, and have the edge.