Friday, September 24, 2010

MTU Weekend Ed. - That's All Folks! (9/24/10 Close)

Thoughts on the big picture

The stock market has made important technical advances over the past week. Most indices have now exceeded their June and August highs – a topping condition called for in Taking Stock (9/17/10).

Chart 1 updates the same table shown last week and highlights new changes over the past week in red. Given the satisfaction of this major technical condition and a clear five-wave advance since the late-August lows (Chart 2), the current rally is finally approaching its end.

The notable laggards are the Russell 2000 index and the Transportation Average. The implications are equally important. First, the current rally is more likely the end of a corrective rebound (Chart 3) than the start of a major advance. Second, the top is likely not yet in place.

In SP500, wave (v) has reached equality with wave (i). A potential target for the top is where wave (v) = 1.618 x (i) which is 1158 or 1164 depending on whether one takes the cash index low or the futures low as the start of the current rally. Let’s call 1158-1164 in SPX our target zone.

Once wave (v) is complete, VIX will likely have managed to put in its overthrow for the wedge (Chart 4).

At that time, That’s All Folks! at multiple degrees of the wave structure in stocks.

Squiggle countdown to the top

Based on the squiggle count of the December futures (ES), the logical location of [3] of i of (v) or iii of (v) is most likely the high around 130PM on Friday. See Chart 5 and Chart 6. The count after Friday’s high around 130PM is ambiguous – i.e. where wave [4] or iv ends. We’ll find out next week.

If we get an extended fifth wave that reaches the target zone, Friday’s high around 130PM is most likely iii of (v). If the fifth wave is relatively small and fails to reach the target zone, Friday’s high around 130PM is most likely [3] of i of (v) assuming the subsequent decline appears corrective.

The good news appears to be that the proposed count works for leaders and laggards across indices. Chart 7 presents the same count for SPX, Chart 8 for COMPQ and NDX and Chart 9 for INDU and RUT.