S&P 500 Futures (SPX) 2011 Technical Outlook |
Trading was very volatile in 2010 and especially in the second quarter, where the index formed a bearish correctional wave. Correctional waves are usually very volatile with heavy fluctuations which reflected the mixed trading for the year.
Assessing the upside wave which started in March 2009 and ended in April 2010, we can see the most accurate description as a complete bullish IM, which was rather clear somehow. The wave was followed by the correction wave which corrected nearly 38.2% of the IM itself from where it entered a new upside wave. The patterns that form an IM followed by a downside correction and an IM are limited, where there are only three patterns: Zigzag (ZZ), Leading Diagonal (LD) and the Impulsive wave (IM). Surely we will exclude the Leading Diagonal (LD) as it mainly requires trading within wedging support and resistance lines and on the chart we can see that the trend was within an ascending channel, therefore the options are limited to either an IM or ZZ.
The first scenario suggests that the index is trading within the fifth bullish wave within the C wave of the ZZ mentioned and shown in red below. This wave might push the index higher towards 1348.00 and 1367.00. Yet assessing the bullish C wave following the bearish B in green, we can see that the internal structure of C is an IM, yet the waves are somewhat short and do not match the length of A wave of the ZZ, even with reaching the targets mentioned which are around 161.8% correction for the bearish wave that started April 2010 and in ended July.
What comes after that? Reaching the suggested targets requires us to observe 1367.00 areas very closely, as these levels might be the long term Potential Reversal Zones (PRZ)! If the index failed to breach this level, it will indulge in a big downside wave that might affect the index for years to come; which is why we are providing the pessimistic chart below.
We can see that the entire upside move that started with the end of the first quarter of 2009 from 672.00 is still valid till now and likely to continue as well in the coming period; it is considered the B wave of the bigger ZZ wave which started in October 2007.
This signals that after reaching areas around 1348.00-1367.00 and if it failed to breach to the upside, will probably start the bearish C wave of the ZZ pattern shown in gray and pinned with the red arrow above.
If this wave was confirmed in 2011, might be the trigger for consecutive bearish waves in the form of an IM as shown above. This wave might take the index to low levels and scatter the gains recorded in 2010, where it might even extend beyond 2011 to also erase the gains acquired in 10, 09 and 2008!
If the index manages to stabilize above 1367.00 then our calculations for the big wave that started since 2007 needs to be reconsidered, where the correction is a big FLAT wave. If we assess the count on the chart we will see that this option is valid and does comply with a lot of internal wave rules as explained on the chart below.
There are some reservations on this scenario, because the B wave -of the ZZ that forms the A of the Flat wave- is very long and the wave. The start of the wave was pointed with the red arrow above and the internal count has been provided to include the possibility of this very optimistic scenario for 2011.
This scenario might be the reason for the upside continuation during 2011 to test areas closer to 2007 peak around 1586.00. And as we mentioned above, this scenario requires the breach of 1367.00.
Now we have two scenarios for consideration in the New Year, the first is optimistic for the start of 2001, and the second is generally positive! Nevertheless, we still a problem that the wave which started on July 06, 2010 was an IM wave which was relatively short. Looking at the chart below, we can also see the possibility of completing the entire IM.
The chart above is indeed worrisome, where it signals the end of the entire upside wave around 1285.00 and at best around 1331.00, where this will be even more pessimistic than the first scenario, yet at the same time it is derived from it. In this scenario we excluded the extension of any internal waves of the presented IM above, and therefore the index will settle for a slight incline and then return to the downside and enter a strong bearish wave.
This scenario and though it is derived from the first scenario it has different targets, and will be more realistic if the index breaches 1140.00 and stabilized below it; while it will be confirmed if the index breaches 1015.00 and stabilizes below it with weekly closing.
To minimize the confusion for you dear reader, we will summarize the outlook for SPX: steady trading above 1140.00 increases the likelihood for the bullishness to prevail in 2011 targeting 1285.00 then 1331.00 and breaching the first confirms the second, while breaching the latter might extend the bullishness towards sensitive areas around 1348.00-1367.00; we need to observe the index closely around those levels as it might extend the general upside move towards the 2007 peak. On the other hand, the failure to breach those areas will drive the index to test the previous level at 1140.00 and the inability to hold above this level is very negative and will trigger a strong bearish wave towards 1015.00 and breaching this level will initiate a new downside move for 2011 and might extend over a relatively long time frame.
About the author: ecPulse
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