MTU Weekend Ed. - Past zero velocity (5/21/10 Close)

The stock market moves as if it were on a giant roller coaster. The market has now gone beyond a major zero velocity point (i.e. peak) for a second time when it topped in April, and is ready to roll over for a thrill. The energy that has propelled the hope rally since the March09 low as well as during decades of credit expansion should now fuel the hard landing ahead.

Chart 1 offers a stylized multi-year projection of the market trajectory if the outlook on a primary wave three (P3) decline plays out. This is the same chart in A Primary Degree Top (5/7/10) , now with the P3 projection shown. It should give an impressive idea of what may lie ahead, including a head-and-shoulder projection of sub-300 in SP500 to come.

Speaking of bull and bear traps (5/14/10), the best gift to the bulls and the bears at the moment is either a meaningful dead-cat bounce which is far from guaranteed, or even a remotely probably new high. The bulls can then exit profitably and the bears can position for the powerful trend ahead.

From the scale of things in Chart 1, minor wave 1 of intermediate wave (1) of P3 will likely end near current levels. It’s possible that Friday’s pre-market low marked the end of wave 1-down. A meaningful wave 2-up rebound is near under this interpretation. However, even in this relatively more bullish scenario, the intraday count suggests that the market can use a fifth wave, (v) of [v] of 1, decline before concluding 1-down (Green labels in Chart 2). Please also refer to charts with the corresponding intraday counts on the SP500 E-mini in the Appendix.

Of course, there’s no lack of more bearish counts. For example, the blue labels in Chart 2 says that the flash-crash is minor wave 1-down, the subsequent rebound is minor wave 2-up and the sell-off over the past week is an yet to complete [i]-down of 3-down. [ii]-up of 3-down is likely to be a shallow retracement and the more forceful [iii] of 3 sell-off will follow.

In either case, next week could prove to be equally volatile.

Bullish alternative counts which suggest new highs are becoming distant possibilities as broad indices threaten to violate the February lows. Chart 3 updates a complex-three P2 that may still be in progress as long as the February low is intact. Chart 3 is listed here for the sake of completeness as well as the observation that during the 2007 and to some extent the 2000 topping process, stocks did not top at the initial break-out of the VIX (Chart 4). Will history repeat itself or will this time be different?


Appendix - counts on the SP500 E-mini