Friday, November 26, 2010

MTU Weekend Ed. - Coiled Spring (11/26/10 Close)

Stocks -- The whipsaw action over the holiday week has shaped the stock market into a coiled spring. The pending breakout is likely to be swift and potentially strong.

The primary scenarios are a swift follow-through sell-off to complete the second part of the decline since the November high (i.e./e.g. minor wave 4) , a forceful rally to start the main upward thrust of minor wave 5 (e.g. wave (iii) of [iii]), and a moderate rebound to continue the sideways wave 4 consolidation in the form of a triangle.

The direction of the breakout, however, is not as clear-cut as one might think.

On one hand, sovereign debt concerns, rising risk premia, a flight to the USD and the appearance of a bear flag argue for at least a swift follow-through sell-off next week.

On the other hand, support from the 50-day moving average on multiple occasions over the past two weeks and the relative strength in the Nasdaq indices, the Russell 2000 index and the DJ Transportation Average have preserved the potential for a nested [i][ii](i)(ii) count (immediately very bullish) and a larger triangle (sideways).

These observations are well reflected by Char 1 to Chart 5.

Thus, Tuesday’s low of 1176.91 and Thursday’s high of 1198.62 in the SP500 index are important support and resistance levels. Note that the SP500 closed at 1189.40, around the 60% division of the 1176.91-1198.62 range.


YM - Dec INDU mini

NQ - Dec NDX mini

USD -- The USD index has now recovered above its July low on recent strength (Chart 6). This development is important from an EWP perspective as it eliminates the immediately bearish possibility that the recent rebound is a small degree fourth wave. It also lends support to the immediately bullish green count that a small degree third wave is already in progress.

However, the USD index is not totally out of the woods yet per the blue count and to a lesser extent the red count. Note that the rebound so far has retraced 37.4% for the April-November decline in the form of a potential zigzag (Chart 7). Based on the blue count, the current rebound would be B of (Y) in a complex three.