Friday, September 17, 2010

MTU Weekend Ed. - Taking Stock (9/17/10 Close)

Stocks, VIX, Gold and the USD index

[Stocks and VIX]

Despite the recent strength in stocks, the April high is most likely the start of the next primary degree bear market. However, the first intermediate degree sell-off is more likely a 3-3-3-3-3 leading diagonal than a regular five-wave decline. Chart 1 updates the road map. Please see relevant discussions in Moment of Truth (9/10/10) .

For the moment, interesting divergences appear among major indices. As of 9/17/10, several indices have already conquered their August highs while others have yet to claim victory (Chart 2). Notable laggards are $TRAN and $RUT and notable leaders are $NDX and $SPX. A Dow Theory non-confirmation exists.

However, odds favor most indices to exceed their June and August highs, especially senior indices such as $INDU and $WLSH. If the Wilshire 5000 Index (and possibly the Dow) does not take out the August high before a sizable decline materializes, an extended advance becomes probable with the current peak being (i) of [c] of 2-up instead of the end of 2-up (Chart 3, green).

Chart 4 and Chart 5 present my preferred wave count on the advance since late August (SPX and the December E-mini).

Friday’s higher high beyond the morning spike in the $RUT (Chart 6) lends support to a higher high in senior indices. In addition, the wedge in the VIX may still lack a final under-throw (Chart 7, right). Chart 8 shows Friday’s intraday count on the SPX.

If a rare running flat is in place in the RUT, odds favor a similar running flat in SPX (Chart 8, green). Should an expanded flat continue to develop on Monday, Friday’s low in SPX is likely to be taken out (Chart 8, blue) while that in the RUT should hold.

Chart 9 updates my preferred count on Gold priced in USD. The current fifth wave advance, wave (5) of [3], since late 2009 is unlikely to extend since
  • Wave (3) between the 2004 low and the 2008 high is already reasonably sizable, particularly relative to wave (1) between the 2001 low ant the 2004 high.
  • Wave 3 of (5) is smaller than wave 1 of (5) in percentage point terms, although not in dollar terms.

[USD Index]
Chart 10 updates counts on the USD index. Near term USD strength looks likely. But any USD strength associated with the red-labeled scenario fits well with the extended rebound scenario in U.S. stocks (Chart 3, green). This would be a near termrisk scenario for both stock bears and dollar bulls.