Friday, October 14, 2011

MTU Weekend Ed. - Retrace or Breakout (10/14/11)

new development
The strong recovery off the lows in stocks has continued for a second week and benchmark indexes closed the week at their highs. As Chart 1 on the SP500 index illustrates,
(1) The 2010 low has remained intact for U.S. indexes.
(2) SPX closed ABOVE its 2010 high (1219.80) and above its 50-day (10-week) moving average.
(3) SPX is back inside the prior trend channel which connects the 2010 and 2011 highs.

Moreover, the Nasdaq 100 index (NDX) has now retraced 83.5% of its decline (Chart 4) and the Nasdaq Composite index (COMPQ) has retraced 62.7% of its decline.

no change in assessment
The analysis in Progress (10/7/11) concludes that “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.”

As a lower low was not made, the market has denied us the luxury to “more comfortably” identify the end of a correction - please see discussions in “scenario 1- correction is over” in Progress (10/7/11) - and leaves the door open that the decline to date is only the first phase.

bullish count
Progress (10/7/11) offers a valid bullish count calling the end of the correction (Chart 2 refreshes) . It has become more relevant now as
(1) The momentum of the recovery to date has been very strong and the retrace in NDX is already very deep.
(2) The bearish count is straight-forward as logic states that regardless of the wave structure of the rebound (see red and purple counts in Chart 6, and note a potential bottom around early November), one can expect new lows (barring truncation) if new highs do not come first.

As Chart 2 indicates, the bullish count is a double three from the February high (blue) or a single three from the early July high (green). Chart 3 shows how this corrective structure fits into a cycle wave b-up still in progress.

Of particular interest is the red corrective count in Chart 2 from the nominal high, which does not assume truncation and accommodates wave ambiguity around the recent low.

From the nominal high, an ABC structure ended at the late August low as wave (W)-down. Wave (X)-up is in progress as an expanded flat - note that the proposed wave A-up from the late August low to September high has 3 visual waves and wave B-down from the September high to the October low has 7 visual waves.

Once wave C-up of wave [X]-up ends, expect another ABC structure as wave (Y)-down to new lows to complete the correction.

The proposed bullish structure in NDX is an expanded flat or a double-three dating back to the February high (Chart 4). Chart 5 shows how this corrective structure fits into a cycle wave b-up still in progress.

bearish count
The red and purple counts in Chart 6 updates the bearish count, calling the current recovery as a wave (B) or wave (2) correction. The red count is the preferred one - the correction is an expanded flat, given how deep NDX/COMPQ has retraced. The purple count is a potential zigzag, with potential for an eventual deeper retrace.

Note that SPX has arrived at the upper edge of important prior resistance (pink line). Market reactions around this area should be telling.

[Shallow Retrace] One way to count the advance since the October low has the coming high as the end of an extended 3rd wave (green, chart 7 and 8). If so, the coming retrace is likely a shallow wave 4.

[Moderate or Substantial Retrace] SPX has satisfied the minimum requirement of a 5-wave advance from the October low, in prices as well as wave structure (even to the squiggle level) (blue, Chart 7 and 8). A top is here or near if the blue wave 5 does not extend further toward the upper channel line.

If this top is wave (A) of a zigzag (purple, Chart 6), expect a moderate retrace.
If this top is wave (C) of an expanded flat (red, Chart 6), expect a substantial retrace to new lows.

[True Breakout] If SPX breaks above 1260.57 (say 1265) first with momentum and without even a green wave 4 retrace, chances are that the blue wave 3 is extending and we are dealing with wave [iii] of 3. One needs to give the bullish count additional consideration.

blog comments powered by Disqus