Friday, August 6, 2010

MTU Weekend Ed. - Almost There (8/6/10 Close)

The rebound from the July low is losing steam as expected (Chart 1). Declining volume, deteriorating breadth (e.g. the advance/decline ratio), and waning momentum (e.g. the negative divergence between price and several technical indicators) are its notable features. The bull trap is in its late stages (if it’s not already over), with potentially one final thrust up which began at Friday’s low.

EWP describes a corrective movement as three, seven or eleven waves and a motive movement as five or nine waves satisfying its cardinal rules. The rebound from the July low has been a five-wave movement to date but only an ending diagonal and not a regular five in its entirety (Chart 1).

With respect to the larger wave structure, the rebound could be the final leg of a large expanded flat which started in late May or early June. If so, minor wave 2-up (or at best wave B-up based on a bullish interpretation) was complete at Wednesday’s high and the next leg of sell-off is already in progress.

A more probable count is that Friday’s drop at the open is the 6th wave of the current rebound and the 7th wave (and likely the final one) is currently in progress. Chart 2 offers a squiggle count on the Wilshire 5000 index under this interpretation. If this is the case, the upside potential is limited, at 1132.35-1147.91 in SPX. I suspect that the top will be at the lower end of this target range.

By the way, the wave structures in the VIX (Chart 3) and the USD/Euro (Chart 4) support a squiggle high in stocks as well. But we are almost there.

The larger degree wave counts on the Gold and the 10Y Treasuries are ambiguous at the moment. But at a smaller degree, the 10Y Treasury yield is about to finish a zigzag (Chart 5) decline and Gold is about to finish as five (Chart 6) –wave advance from its June low. Again, we are almost there.

Another reversal across several asset classes is around the corner.