Watching for a Bounce Up Out of the Channels

There was an “uptrending” day formed on the cash S&P500 chart last Friday. Our working hypothesis is that a five wave impulse pattern has completed from the June 5 high. In turn, this means that we are now in a larger degree fourth wave (iv) [scenario 1] or that a complete zigzag pattern has completed from the May 19 high [scenario 2].

I favor scenario 2. Why? Market technicals. I have shown in previous posts how the bottom last Thursday was at price targets and DeMark oscillator lows. Now the daily chart has also flashed a “buy” signal between the RSI and Composite Index. Therefore, even though the fourth wave scenario can not be ruled out I favor the completed zigzag scenario.

In the bigger picture I view the May 19 top as the end of an “A” wave (from the January low) which implies we are now in a larger “B” wave. The just discussed zigzag is part of this larger “B” and must now be followed by another corrective pattern or an “x” wave. I prefer the “x” wave option since my price/time work shows that 1406.32 should not be broken over the near term. At a minimum, I would expect the top of the orange channel line to be broken by this “x” wave.

For Monday, expect resistance first at the long (green) moving average. If this is broken the next level is at 1369-73 and then 1382-86. Support is at 1351. A move below Thursday’s low means that scenario 1 (impulse scenario from May 19) is preferred.