While I continue to favor the conclusions cited in the October 14th analysis titled Looking Ahead, I can’t help but to give the chart patterns below their due considerations.
Chart 1. $SPX (S&P 500 cash index) – The recent decline appears to have unfolded as a double zigzag, with the wave X culminating in a triangle. (See implications below.)
Chart 2. $NQ Z6 (Nasdaq December Futures contract) – The recent decline appears to have unfolded as a double zigzag, with the wave X culminating in a triangle. (See implications below.)
In chart 1, the decline in the $SPX is shown to have unfolded as two zigzags separated by a triangular consolidation (wave X). Please note that this wave interpretation is my own, and it could very easily differ from someone else’s. (Hint: subjectivity).
In chart 2, the pattern is eerily similar, given the presence of a triangle in the final installment of wave X, . Regardless, of whether the wave X is a triangle or culminates in a triangle, the implication is the same, according to The Elliott Wave Principle (Prechter and Frost):
In short, if we are to take this EWT guideline at face value, it’s not unreasonable to conclude that the ensuing wave Y depicted in both charts was the final installment of the multi-week pullback. While the evidence is not overwhelming, it’s good enough to warrant a least some profit taking. Hence, today’s decision to close the $SPY November 18th 214/213 bear put spreads and the 216/217 credit call spreads.
Volatility
As far as the $VIX, chart 3 below depict patterns with potentially unfinished business. Should the presidential election result in a Brexit-like outcome, expect the ‘fear index’ to reach as high as $36.
Chart 3. $VIX – Two bearish Crab patterns targeting $26 and $36, respectively.
From an auction marketplace perspective, the 2122 level (S&P December futures contract, ES Z6) coincides with the 20-sma. Should this directional conviction persist, and the 2122-2126 area taken out (chart 4), look for this bullish move to aim for last week’s high (2130.50), followed by ~[2136 to 2149]. We DO NOT KNOW whether the current move is part of a relief rally (a second wave X) or a full-on reversal. (Note: should my wave interpretations in chart 1 and chart 2 prove correct, the aforementioned EWT guideline would suggest a full-on reversal).
Chart 4. ES Z6 (S&P December futures contract) – The vPOC of the upper distribution that formed within last week’s auction was reached earlier today at 2122, the same level currently occupied by the 20-sma.
Please note that the 2136-2149 area was derived from chart 5 and chart 6 below, i.e., the coincidence of the 100-dma and October’s POC on one lower end, and the triangle’s apex and October’s value area high on the upper end.
Chart 5. ES Z6 (S&P December futures contract) – A Move above 2122-2126, should target last week’s high of ~2130, followed by ~2135-2150.
Chart 6. ES Z6 (S&P December futures contract) – A Move above 2122-2126, should target last week’s high of ~2130, followed by ~2136-2149 (October’s POC to Value Area High).
Philly Semiconductor Index
This index has been a reliable guiding light for years, and as far as the current move is concerned, I strongly feel it’s got unfinished business. The bullish Gartley PRZ (~775) remains the minimum objective.
Chart 7. An ABC pullback aiming for at least the bullish Gartley objective (~775).
Open Interest
Finally, there’s not much to glean from the $SPY‘s open interest landscape (chart 8), other than the risk-off attitude conveyed by the unusually low number of open weekly call contracts. This could easily open the door for a move to ~215.
Chart 8. $SPY open interest – An unusually low number of open weekly call contracts.
In light of the above, I now find myself on the fence insofar the likelihood of a Brexit-like outcome (a Trump victory) on November 8th. As far as risk management, we closed the two aforementioned positions profitably, leaving open two bearish positions: $SPY November 18th 208/207 debit put spread (speculative trade in the event of a Brexit-like outcome) and $QQQ November 18th 117/118 credit call spread (a time decay trade).
Trade Smart,
Peter Ghostine (@peterghostine)
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