Friday, March 26, 2010

MTU Weekend Ed - A Turning Point (3/26/10 Close)

Bottom line: Thursday’s intraday reversal in stocks signals the presence of a potential turning point, possibly a significant trend change. Friday’s intraday high remaining intact is a necessary condition for this initial sell-off to gain traction and momentum. In addition, an update on my long term outlook on bonds/interest rates.

A potential turning point
While stock indices have continued their advance over the past week with SPX up 0.58% for the week and up 1.79% to Thursday’s high, Thursday’s intraday reversal (-15.6 points or -1.32% in SPX)

[1] Signals a trend change with respect to the advance since the 2/5/10 low (of 1044.50 in SPX), see Chart 1. This scenario suggests new recovery highs following a moderate pullback, possibly to the high end of the 1090-1135 range in SPX.

[2] Represents the end of P2, see Chart 2 (red labels). This scenario suggests that the low of last March will NOT hold.

[3] Represents the nominal high of this segment of the rebound, see Chart 2 (green labels). This scenario suggests an even more complex structure of rebound is in progress since last March and the first leg of which has ended at the January 2010 peak. Wave (X) in the form of an expanded flat or a triangle is currently in progress and the current peak is wave X (or wave B) of (Z).


What are the odds of this being the top?
The most relevant question is certainly whether this is the “top”, within the context of scenario [2] or [3] above.

I think the answer is in the details, i.e., the lower time frame structure of the decline since Thursday’s high. Chart 3 shows how I’d count the decline so far if Thursday’s high is indeed a significant turning point. It is obvious that Friday’s intraday high remaining intact is a necessary condition for this initial sell-off to gain traction and momentum.


Bonds – a cycle wave degree trend change
Recent sell-off in U.S. treasuries has generated an increasing amount of attention worldwide.

In the 2/19/10 post of my long term outlook on stocks, bonds, gold, oil and USD – see the left-hand side panel of the MTU web page – I commented that “a cycle wave degree trend change has likely started (in bonds).”

This view and my wave count of the long bond have not changed. Chart 4 offers an update on the long bond valuation changes.

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