Saturday, October 1, 2011

MTU Weekend Ed. - Around the world in 5 waves (9/30/11)

Last week in Twist and Turn (9/23/11), we
(1) observed some notable divergence among U.S. benchmark stock indexes, which has remained so at the quarter’s end
(2) highlighted the top bullish and bearish scenarios, which are refreshed in Chart 1 and Chart 2 (blue and red). The green count in Chart 2 will be discussed in detail below.

This week, we make an observation regarding the notable divergence across some global benchmark stock indexes and an inference that

from a bearish perspective, odds favor a completed initial sell-off unless the 5th wave extends.

Global Dow, German DAX and U.S. SP500
Let’s assume that one counts a five-wave impulse decline from the nominal high and attempts to identify the end of such a decline, across key global benchmark stock indexes in the developed markets-
(1) The Global Dow Index (GDOW), "a 150-stock index of the most innovative, vibrant and influential corporations from around the world (http://www.djaverages.com/?go=globaldow-overview)
(2) The German DAX Composite (DAX), a key European benchmark.
(3) The U.S. SP500 Index (SPX), a key U.S. benchmark.

The Global Dow is an appropriate candidate to start our count. Chart 3 presents such counts for GDOW, the primary count being the blue count with the red count as a slight variation.

blue count
(1) Wave 4 is a running flat - not rejected by those in DAX (Chart 4, blue) and SPX (Chart 2, green).
(2) The subsequent sell-off is wave 5 which is about 0.78 x wave 1 at the moment. GDOW made a lower low while DAX and SPX truncated.
(3) The subsequent sell-off is wave [i] of wave 5 - rejected by DAX (Chart 4, blue).

red count
(1) Wave 4 is a zigzag - severely out of sync with DAX and not the case in SPX.
(2) Wave 5 is an expanding EDT with the final decline in progress - severely out of sync with DAX and SPX.

Note that the blue count is the consistent one among GDOW, DAX and SPX, under the assumption of a five-wave impulse decline from the nominal high. From a probability perspective, the key then is whether the blue wave 5-down extends in SPX and GDOW - whether the recent low is the end of 5-down or just [i]-down of 5-down.

Additional considerations
That wave 5-down just started (red 4 in DAX and green 4? in SPX) is a possibility yet to be confirmed or rejected. The challenges to this scenario are that
(1) it is severely out of sync with GDOW
(2) it demands truncation of the prior rebound in SPX as well as NDX. However, it did make a nice 7-wave rebound in NDX instead of 5.
But note that this count is nearly immediately bearish - lower lows before the recent high of 1195.86 in SPX is taken out on any rebound.

We’ll find out soon enough.

Appendix
Here's a look at the initial decline from the 2007 nominal high. Blue [iv] of 5 is a triangle with [v] of 5 a regular five. Green [iv] of 5 is a running flat with [v] of 5 a contracting EDT.
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