Saturday, July 9, 2011

MTU Weekend Ed. - Terminal Wave (7/8/11 Close)

The near term primary count for U.S. stocks is that the initial advance since the June low (Chart 1, red) ended this past week and a downward 2nd wave, (B) wave or E wave (Chart 2) retrace is in progress. A lower probability alternative is that Friday’s decline is only wave [iv]-down of the advance since the June low (Chart 1, blue).

A few words on the triangle count.
First, a triangle dating back to the February high now appears less likely vs. a flat that ended at the June low, given the structure and momentum of the recent advance as well as the fact that NDX has managed to slightly exceed its April/May high.

Second, if a triangle is indeed in play, odds favor a contracting triangle for broad market indexes and an expanding triangle for Nasdaq indexes. In other words, expect the June low to hold for SPX/INDU/WLSH but to be breached for NDX/COMPQ if a large triangle is indeed in progress.

You are here (the big picture)
The late June's advance fits nicely into several long term tracking counts discussed in Tracking Scenarios (6/10/11) and The Big Picture (U.S. stocks, 6/25/11 update).

The small double zigzag, triple zigzag and large bull market counts are particularly relevant. The following discussion updates these counts and projects upside targets.

[Disclaimer] Here we assume that the correction since the February high is over or nearly over per the triangle count. Obviously, more bearish potential exists if otherwise - i.e. the wave [X], (X) or (4)/2 correction in the following counts continues. Finally, the entire hope rally could have ended here or with a small 5th wave advance if the recent rise is minor wave 5 since the July 2010 low. The latter are considered lower probability scenarios for now.

[Small Double Zigzag, Chart 3] The recent high is wave 1-up of (C)-up of [Y]-up. This count targets the 1460-1500 area. Note that from the recent low of 1258.07, (C)=0.618(A) at 1463.96. And the second zigzag [Y] reaches equality with the first zigzag [W] at 1494.57.

[Triple Zigzag, Chart 4] The recent high is wave (A)-up of [Z]-up. This count targets the 1450 area where [Z]/[Y] equals [Y]/[W].

[Large Bull Market, Chart 5] The recent high is wave 1-up of (5)-up of [1]-up. Since the proposed wave (3) is shorter than wave (1), wave (5)-up is capped at 1591.23 or 1617.74 depending on where wave (3) actually ended.

[leave room for an EDT] Note that all of the above counts calls for a terminal wave for the advance since the March 2009 low. While it is too early to tell, it is prudent to leave some room for the possibility that the proposed terminal advance develops into an ending diagonal triangle. This possibility also appears relevant given the ambiguity between a three or a five regarding the rise since the nominal low in June to date (Chart 1).