Sunday, October 9, 2011

MTU Weekend Ed. - Progress (10/7/11)

new development
U.S. stocks made meaningful lower lows this past week. A visual 5-wave-like decline from the nominal top is now present. In the meantime, key European stock benchmarks managed to deliver a higher low and a higher high. It’s prudent to keep an eye on such divergences among global indexes. See Chart 1 (SPX) and Chart 2 (GDOW) and also refer to Around the world in 5 waves (9/30/11) for additional discussion.

The August lows in all major U.S. stock market benchmarks (cash and futures) were successfully and adequately breached to register a lower low thanks to a sell-off during the early part of the past week. At the low to date, SPX retraced 42% of the Hope Rally and was down 21.58% (1370.58 to 1074.77). Subsequently, SP500 quickly rebounded 8.99% (low to high) and closed the week up 2.12%. At Friday’s close, the most recent pivot high remained intact.

A visual 5-wave-like decline from the nominal top is now present in U.S. stocks - a structure that often suggests additional weakness in time.

In contrast, prior lows in key European stock benchmarks (DAX (Chart 3), CAC, FTSE) held during the sell-off this past week. Moreover, the subsequent rally pushed all three indexes above their most recent pivot highs.

current thoughts
A continued advance without making a lower low is likely just a rebound, to be followed by another leg of sell-off to new lows. A sell-off from current levels to new lows (likely beyond 1050) could mark the end of the correction with the subsequent advance having a meaningful chance to extend the Hope Rally to a new high. See details below.

scenario 1 - correction is over
At the latest low which is 42% retrace of the Hope Rally and down 21.58% from the high), U.S. stocks have satisfied the minimum requirement to call the end of the correction dating back to either the Feb top (Chart 1, blue+green ABC-(X)-ABC), or the early July orthodox top (Chart 1, red+green ABC). However, the final (green) wave C remains disproportionately small with respect to (green) wave A. As such, we have a valid count if the market rises to a new high from here but must assign this count a lower likelihood for the moment.

scenario 2 - correction will be over after a near immediate sell-off to new lows
The proposed corrective structure (ABC-(X)-ABC from the Feb top or ABC from the early July top) appears more complete after a near immediate sell-off to new lows as marked by the blue trend lines (expanding ending diagonal triangle) in Chart 1.

This also fits the observation made in Around the World in 5 Waves (9/30/11) that a fresh low this past week could imply extension of a small degree 5th wave.

If the proposed expanding EDT plays out, the new low will likely break below the 1050 area on an immediate sell-off as wave [v]/[e] should be larger than wave [iii]/[c].

Once the expanding EDT concludes, the subsequent advance has a meaningful chance to extend the Hope Rally to a new high (Chart 1, blue), or at least deliver a strong multi-month rebound (Chart 2, purple).

scenario 3 - a rebound for now, followed by another sell-off
This is the red count in Chart 1 with the rebound being wave C of wave (B)/(2). A continued advance without making a lower low is likely just a rebound, to be followed by another leg of sell-off to new lows.
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