Friday, January 8, 2010

MTU-A primary degree trend change ahead

The 11-month rally is coming to an end
The advance in stocks since last March, most likely a primary degree rally, is coming to an end based on its wave structure, along with other fundamental and technical considerations. Based on the wave structure, I think we can expect SPX to peak as soon as next week.

The subsequent primary degree decline will be substantial. Please see my thoughts on how we fit the coming sell-off into the big picture in A New Year’s Resolution (12/31/09).


Wave structure and targets for the top
The rally since last March is best counted as a triple three, most likely a triple zigzag as indicated by the blue labels in Chart 1.

Under this interpretation, the recent upward crawl has the distinct look of an ending diagonal, potentially a couple of them at various degrees. The 1/7/10 pre-market low is likely the end of a small degree fourth wave (say a minute degree [iv]), and Friday’s rally into the close is wave (c) of [v] of C as indicated in Chart 2. Wave (c) equals wave (a) of [iv] at 1142.75 in the March SPX mini contract (or about 1146.46 in SPX cash). It equals 1.618 times wave (a) at 1150.01 (or about 1153.72 in cash). Both targets are less than 1% away from Friday’s close.

There’s an element of uncertainty (mainly with respect to the longer term outlook) whether this particular non-overlapping triple-three is actually a five, as indicated by the green labels in Chart 1. However, we can nail down the maximum upside potential if we indeed have a five on hand. Since wave (3) is smaller than wave (1), the highest level SPX can achieve in this case is 1261.42, about 10% above Friday’s high. It is not clear that SPX can reach 1260. Wave (5) so far looks like a large ending diagonal at best. In other words, the top may be quite close as well, even if the entire rally is a five.
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