At the same time, given the heightened geopolitical and the associated economic risks, it is prudent to keep an eye on the potential for a larger correction or the end of the hope rally.
Likely a short-lived correction ...
Odds appear to favor the recent stock market gyration being another minor or minute degree correction of the hope rally, based on
[1] the wave structure of U.K. FTSE and German DAX - both have traced out a "clear" zigzag over the initial decline from their nominal highs (Chart 1 and Chart 2)- and the likely continued correlation between $SPX and these European benchmark indexes.
[2] the fact that rising crude oil prices have been a key driver of and outlet for investor sentiment recently, and that Europe is close to the oil shock as reflected by the record level of Brent/WTI spread and the pronounced spike in Brent crude prices.[3] the stock-market-bullish potential that WTI crude prices could retrace back towards $100 or below in the near future based on its wave count (Chart 3).
Chart 4 shows the sideways consolidation in the FTSE 100 index year to date and the potential wave count. In terms of the wave structure, the sideways consolidation is likely a triangle or a complex double three, nearing completion .
Key implications
[1] If benchmark U.S. stock indexes mirror the structure of U.K. FTSE, from a wave labeling perspective, the current correction potentially could have started in mid-January instead of mid-February (Chart 5 and Chart 6).
In this case, the correction likely should end early next week, with perhaps one more small-degree decline to complete.
[2] Alternatively, since the recent high is as a good starting point of the correction as the mid-January point, the correction is either over at the March 2nd low (Chart 7, blue) or have one more decline to go (Chart 7, red).[3] In terms of wave labeling, this pullback is either minute wave [iv] of minor wave 3 (blue count, more eventual upside potential) OR minor wave 4 (green count, less eventual upside potential). Where wave (B) ends determines whether wave [iv] or wave 4 is in progress, as discussed in detail in Decision Point (2/25/11).
[4] Furthermore, since wave [iii] or 3 is shorter than wave [i] or 1, the next leg of advance (wave [v] or 5) is capped by the magnitude of wave [iii] or 3.
[5] If both FTSE and SPX are tracing out some kind of triangle, don't be surprised to learn a newsworthy event - likely lybia resolution, relief of the perceived oil supply stress, etc - in the near future that triggers the next leg of advance. Why? Because the final leg of a triangle has a tendency to be accompanied by notable news event.
... but don't discount the bearish possibility (that the top is in)
With the presence of a logical ending point to the hope rally based on wave structures and the arrival of the first Fibonacci time turning point (see Bull market, B-wave and Beyond (2/18/11) ), its prudent to keep track of the bearish possibility (or the alternative count) that a major top (if not the top) is in (Chart 8). Furthermore, there's no guarantee that SPX should be in sync with European benchmark indexes.In this case, expect at least a multi-month pullback if not worse.
The bearish count is straightforward. The recent nominal high is the top - P[2] or [W] of x or x itself. The February 24th low is wave [i]-down and the March 3rd high is wave [ii]-up. A supposedly forceful wave [iii]-down started this Friday.
Appendix - oil and dollar squiggles
