Saturday, March 6, 2010

MTU Weekend Ed.- An EW Roadmap (3/5/10 Close)

The Nasdaq Composite index and the Russell 2000 index rose to a new recovery high on Friday, while large cap indices have remained below their January peaks but appear poised to do the same. In global markets, the FTSE 100 index also eked out a tiny new recovery high while the high is unconfirmed by the DAX and the CAC40.

MTU’s primary view (that the January peak finally marked the start of the next primary degree decline) is at the brink of being rejected. It is already the case in smaller cap indices given the new recovery highs. There should be clarity on the larger cap indices over the next week or two.

Objective EW analysis offers the following ROADMAP for U.S. stocks. I list the top four scenarios in the order of increasing bullishness. The first three characterize the rally over the past year as a bear market rally whereas the last scenario describes it as a continuation of the existing multi-decade bull market.

I’m sympathetic with, at the moment, Scenarios 2 and 3. But I am by no means discounting the most bearish Scenario 1 yet. I also think, at the moment, Scenario 4 is a wild card scenario. I’ll adjust my view if necessary based on additional market development.

An EW Roadmap for U.S. stocks (as of 3/5/10 close)

Scenario 1. The January peaks hold for the large cap indices while the smaller cap indices top now.

*This type of non-confirmation among major indices at market tops have occurred in the past and could also turn out to be the case this time.

Most recently, it occurred at the 2007 top. The Dow, SP500 and the Wilshire 5000 index topped on Oct 11, 2007 while the Nasdaq indices topped 14 trading days later, on Oct 31, 2007. SPX had retraced up 73% and the Dow has retraced up 70% as the Nasdaq indices made new highs.

Mar 5, 2010 is 32 trading days later than the 1/19/10 peak in several cash indices. SPX has so far retraced up 89.6%, and the Dow has so far retraced up 82.3%.

*The wave structure since the 2/5/10 low, particularly in the Dow, counts well/better as being corrective so far (Chart 1). If so, this count accounts for the triangle (as marked on Chart 1) well and prevents it being counted as a second wave. Note that it is not easy to count the rally since the 2/25/10 low as an impulse wave, unless it is the beginning of an extended wave – iii of (iii)[iii] OR (iii) of [v].

Scenario 2. The market is just approaching the end of the primary degree advance since March 2009, in the form of a triple three (Chart 2). Expect new recovery highs but with moderate upside potential before a primary degree trend change to the down side begins.

*Within the second intermediate wave (X), the 11/2/09 low was lower than the 10/2/09 low in some indices such as COMPQ, lending support to interpreting it as an (X) wave.

*It is obvious from Chart 2 that the triple threes have progressed with successively smaller percentage gains. If this pattern holds, the eventual top should be below 1279.03, and very likely in the neighborhood of 1168.86 where (Z)/(Y)=(Y)/(W) in percentage terms AND where C of (Z) is roughly equal to A of (Z).

Scenario 3. The March 2009 low marks the end of a 9-year cycle wave w in the form of a flat and the beginning of a cycle wave x-up.

*This count faces a particular challenge in Nasdaq indices. The structure between the 2000 peak and 2009 trough does not resemble any of the three categories of flat structure as the 2007 peak is lower than the 2000 peak but the 2009 trough is higher than the 2002 trough.

*Thus it’s possible that the Nasdaq indices is out of sync with senior indices and is tracing out a different structure at the cycle wave degree.

*This cycle wave x-up can probably lasts about 18 to 30 months, starting from March 2009.

*Or this challenge lends support the big picture count in Scenarios 1 and 2.

[3A] The 2/5/10 low marks the end of the first leg of primary wave [X] or the entire primary wave [X] (Chart 3A).

*If the 2/5/10 low is (A) of [X], (B)-up of [X] is currently in progress with moderate upside potential. If [X] turns out to be a flat, wave (C)-down of [X] is likely to pull SPX to below 1000. Note that the 0.382 retracement is at 965.69.

[3B] The rally since March 2009 is an impulsive primary wave (A)-up of cycle wave x. The 2/5/10 low marks the beginning of wave 5-up of (A)-up (Chart 3B).

*The challenge to this count is that it is not easy to count any intermediate degree advance since March 2009 as a “five”.

*In order to prevent (3) of [A] from being the shortest under this count, wave [A] should peak below [1189.34-1215.82] or [1210-1239.70]. In other words, expect a higher high with moderate upside potential from current levels.

Scenario 4. The supercycle wave (V) since the mid-1930s still in progress. The March 2009 low marks the beginning of primary wave [5]-up of V(V) (Chart 4).

*This is the alternative count I discussed in The Big Picture (2/21/10).

*The rally since the March 2009 low is most likely intermediate wave (1) of [5], to be followed by (2)-down of [5] once complete. The intermediate wave (2) correction should at least retrace back to around the 1044.50 level with a real potential to retrace much deeper with the appearance to retest the March 2009 low as second waves have the tendency to do so.

* The wave structure of the post-March2009 advance is the same as that in Scenario 3B (Chart 3B). The comments in Scenario 3B regarding its challenge and its upside potential are also applicable here.
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