Friday, October 1, 2010

MTU Weekend Ed. - A Potential Top (10/1/10 Close)

Counting down to a trend change
If the April high marked the end of advance since March 2009, it’s now time to count down to the next leg of decline. Moreover, Thursday’s high presents a probable top.

In EWP terms, if the April high is the end of primary wave [2]-up under the most bearish count, the end of minor wave 2-up is insight if not already in place this week. Alternatively, if the April high is the end of primary wave [1]-up under the most bullish count, the end of intermediate wave (B)-up is insight if not already in place this week. The difference between these two counts is whether the bottom falls out prior to the subsequent bull-market.

Price structure, time relationship and sentiment together present ripe conditions for another market trend change to the downside. These analyses are available elsewhere and will not be repeated here. However, we’ll highlight a few pieces of more original and relevant content.

[1] The Russell 2000 index and the Transportation index have caught up with the rest of the pack nicely over the past week. All indices have now exceeded their June and August highs by a decent margin.

[2] SPX has “reached” the lower end of our target zone of 1158-1164, where (v) = 1.618 x (i). Thursday’s high in SPX was 1157.16.

[3] A clear (intraday) five wave decline from Thursday’s high of a maturing rally is now present and warrants attention.

[4] Our wave counts suggest that the advance since late August is either over or nearly over with moderate upside potential.

These observations suggest a probable top at Thursday’s high, or a top in sight if there should be more additional push higher.

Wave counts and targets
We offer two near-identical wave counts each for SPX (Chart 1) and RUT (Chart 2). The blue-count marks the top at Thursday’s high. The green-count allows for one additional moderate high.

Within the green-count, wave iii of (v) is shorter than wave i of (v). If this count is correct, one of the EWP cardinal rules suggests that the cap should be capped between 1157.16 and 1170.45/1173.79 in SPX, using Thursday's or Friday's low as the end of wave iv. Note also that wave v = 0.618 x wave iii at 1157.32/1160.66, just a hair above Thursday’s high.

Alternative scenarios if markets rise above the April high and the July low survives
As a preview, Chart 3 offers top scenarios if the market rises above the April high and the July low survives. They are

[Blue] Incomplete P[1]-up (bullish)
[Red] Incomplete P[2]-up (bearish)
[Green] Budding P[3]-up (bullish)
[Grey] P[Y]-up - of cycle wave a-up of super-cycle wave (b)-up, or of some larger corrective structure

We’ll discuss the odds of these scenarios in detail when the April high is breached as additional price actions are likely informative.

Appendix -
A potential bottom in the USD index

The Russell 2000 index looks particularly bearish after having caught up over the past week.

SPX squiggle count
The decline into the close looks like an LD or a small degree double three - not conclusive yet. The rebound in ES after the close is consistent with both counts so far.