What will Markets do with a Brexit like Outcome?

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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