Friday, July 2, 2010

MTU Weekend Ed. - You Are Here (7/2/10 Close)

The big picture

The recent sell-off, wave structure, and market internals continue to support the interpretation of a primary degree trend change to the downside. The April 2010 high is unlikely to be violated for some time, likely for years.

Near term ambiguities regarding where the market is with respect to the new primary degree bear market remain.

While the primary count places the recent reversal since 6/21/10 as minute wave [i]-down of minor wave 3-down of intermediate wave (1)-down of primary wave [3]-down, other interpretations cannot be ruled out just yet. Thus, the 6/21/10 high (1131.23 in SPX) is a logical hedge-point for those who have short exposure.

Near term small degree ambiguities notwithstanding, the most important message is that if the primary degree [3]-down interpretation is correct, [iii]-down of (1)-down will likely be depressing and [iii]-down of (3)-down will likely be devastating.

Primary wave [3]-down (P3) is most likely in progress
It’s very informative to compare the current minor wave 1-down (from 4/26/10 to say 5/25/10) of P3 with its counterpart in P1 (from 10/11/07 to 11/26/07). For 1-down within P3 (Chart 1), we have

{1} worse breadth (e.g. as measured by the NYSE advance/decline ratio)
{2} higher volume
{3} sharper decline (e.g. the sell-off in 1’(1)’[3] is -179.02 points or -14.676%, that in 1’(1)’[1] is -169.99 points or -10.849% in SPX)
{4} potentially shorter duration (e.g. 1’(1)’[1] took 46 calendar days, 1’(1)’[3] took 29 calendar days if it ended on 5/25/10 and 43 calendar days if it ended on 6/8/10). But see discussions below regarding the possibility of an even lengthier 1-down of P3.
{5} A similarly positioned death cross (MA50 crossing MA200 at the early stage of 3-down

Indeed, market dynamics so far support the interpretation that P3 has started.

You are here (Chart 2)
[Primary count-Red Labels] Minor wave 3-down of intermediate wave (1)-down of P3 is in progress, the 6/21/10 high of 1131.23 in SPX will hold for a long time.

[Alternative count 1- Green Labels] Minor wave 2-up of intermediate wave (1)-down of P3 is an expanded flat and is NOT complete. The 6/21/10 high of 1131.23 in SPX will be taken out before the market reverse down once 2-up is complete.

At Friday’s low, [b] of 2 is 1.351 x [a] of 2 in SPX and 1.172 x [a] of 2 in the Dow. Since the typical ratios are 1.236 and 1.382, and we most likely have a zigzag decline from the 6/21/10 high so far, an expanded flat is not an unreasonable interpretation. 1.382x[a] translates to 1008.15 in SPX and 9438.7 in the Dow, and 1.236x[a] translates to 9560.74 in the Dow.

[Alternative count 2 – Blue Labels] Minor wave 1-down of intermediate wave (1)-down of P3 is a leading diagonal and is nearing complete (if not already). SPX should not decline below 998.44 before a sizable rebound, and the 6/21/10 high of 1131.23 in SPX will most likely be taken out by minor wave 2-up.

If we accept the flash-crash prints at their face value, minute wave [iii] is shorter than [i], and minute waves [ii] and [iv] are zigzags. Since minute wave [v] should be shorter than [iii], 998.44 in SPX is a floor for minor wave 1-down.

[Wild card count – Grey Labels] The sell-off from the April high is an ABC-X-ABC correction, not P3. However, the market should decline to a meaningful lower low before the 6/21/10 high of 1131.23 in SPX is taken out by the subsequent advance.

Under this interpretation, the market is only wrapping up the second A wave.


1 comment:

  1. Excellent analysis. I am following your Alt 1 (green). You make a great case for your primary. But I would expect 1 of P3 to reach lower levels (closer toward Mar 09 lows). I am an EW "nubie". I also follow market cycles work and believe we are near a correction point of this downturn. Your S&P 1131 level is is a great point to watch. I also believe "government" is going to try one last effort at QE which will raise market before the severe plunge. I closed all my shorts on 2 July and am sitting all cash until I get a better view next Tues/Wed. Great site and analysis. Thank you!