Friday, September 23, 2011

MTU Weekend Ed. - Twist and Turn (9/23/11 Close)

When the Fed twists, the market turns. Stocks and commodities fell sharply as the U.S. dollar soared - SPX down 6.54%, CRB index down 8.4% (notably oil and gold) and USD index up 2.48%. In Europe, Italy's MIB index violated its March 2009 low.

Stocks - a great retest or writing’s on the wall, a meaningful low approaches
Bottom line
Given the substantial divergence among benchmark indexes at the top (see Wave Logic (8/19/11)) as well as duing the sell-off (see below), odds favor two primary scenarios

(1-a great retest) the correction was over at the early August low in futures (to be invalidated if futures drop below the early August low)
(2-writing’s on the wall) an upward (expanded) flat wave (B)/(2) or sideways triangle wave (B) rebound is still in progress before a major sell-off to new lows

Both scenarios point to a meaningful near term advance, but with substantially diverging trajectories thereafter.

Notable divergence
The post-FOMC sell-off pushed the Dow, Transports, NYSE composite and Russell 2000 to fresh lows. A visual five wave decline from the 2011 high is now present in these benchmark indexes. EWP states that an initial five-wave decline is never the end of a sell-off, unless it is wave C of an expanded flat. However, the above observation is not yet applicable to the Dow and the Russell 2000 futures as they have not break down to a fresh low yet.

A fresh low or a five-wave decline is not confirmed (or yet to be confirmed) by the broader SP500 and Wilshire 5000 indexes. But the proposed benchmark low in SP500 was indeed breached, sending a serious warning that the near 20% decline in recent months may only be the initial sell-off rather than the end of a correction - breaching the early August low in futures likely confirms it.

Meanwhile, the relative strength in the Nasdaq composite index and Nasdaq 100 is notable as they are still far from making a lower low.

Bullish Scenario - a great retest
Chart 1 presents the bullish interpretation on SPX that the correction since the Feb high has ended in early August. The current sell-off is a wave 2 retest of the low, with the ES (Sep) low of 1070 as a level of invalidation.

A close up of the count on ES (Dec) is shown in Chart 2. Note that there are 17 bars each for the proposed wave 1-up and wave 2-down since the August low under this interpretation - time equality on top of a deep retrace that typically follows a leading diagonal.

The blue count in Chart 3 reconciles this bullish interpretation with NDX.
Bearish Scenario - writing’s on the wall
As observed above, the substantial divergence among benchmark indexes along with a bottoming DAX (Chart 4) could suggest that the upward correction since the August low is still in progress - in the form of an expanded flat, triangle or a corrective combination.

Chart 5 presents the bearish interpretation on SPX and the red count in Chart 3 reconciles this bearish interpretation with NDX.

Appendix --