MTU Weekend Ed. - Intermediate Term Count Update (11/4/11 Close)

Large stock market swings millennium to date, particularly those in 2011, have produced enough structure to shed additional light on the intermediate term path of U.S. stocks. It’s a good time to gather our thoughts. Please see The Big Picture (U.S. Stocks), updated June 2011 for discussions on the long term count.

Top long terms counts can be categorized as follows.
(1- new bull market ) The 2009 low marked the beginning of a new bull market, impulse wave advance in EWP terms.
(2- hope rally is still in progress) The 2011 sell-off is a major yet a mid-term correction of a corrective rebound against the 2000-2009 decline.
(3- hope rally is over) The 2011 sell-off marked the resumption of a major bear market dating back to 2000.

I have some thoughts regarding which scenario is more likely, but it is prudent to let the market speak for itself. Here are some details. In all cases, please note the role of a decade-long support-resistance zone going forward.

It's a new bull market (Chart 1)
It’s reasonable to label the 2000 top as the end of a third wave, given the sideways nature of the
bear market over the following decade. Under this interpretation, the 2000-2009 correction, a fourth wave, takes on the structure of an expanded flat. However, there is much ambiguity surrounding the degree of the proposed third wave. As a result, there is much ambiguity surrounding the ultimate upside potential of the fifth wave in progress. See Chart 1.




Hope Rally is still in progress (Chart 2)
The 2000-2009 bear market, an expanded flat, is labeled as wave a (or w) of a much larger correction. The rebound since the 2009, the Hope Rally, is wave b (or x). Once the Hope Rally is over, a wave c (or y) decline is likely to push the market to new lows.

However, the 2011 sell-off is a major yet a mid-term correction of the Hope Rally. Two top counts are worth noting.

(green) The October 2011 low marked the end of a running flat or an odd looking (W)(X)(Y) correction dating back to the 2010 high. The current upswing will break above the decade-long support-resistance zone to complete a large zigzag-like [A][B][C] structure. Wave [C]-up can end below or above the 2007 high - that’s the nature of b waves.

(blue) The May 2011 high marked the end of an initial zigzag-like structure as [W]. The decade-long support-resistance zone where the market is current approaching is likely to offer resistance and induce a wave (C)-down of [X]-down. Thereafter, the final zigzag-like structure as wave [Y] will possibly produce an inverse head-and-shoulder pattern around the decade-long support-resistance zone and then push the market to new recovery highs.

Hope Rally is over (Chart 3)
The 2011 high marked the resumption of a bear market dating back to 2000.

Two top counts are worth noting. The 2009-2011 rebound, the Hope Rally, is wave b (or x) under one count and wave [2] under the other. The key differences between the two counts are the magnitude (large vs. huge) and wave structure (proportionate vs disproportionate three waves) of the resumed bear market.

(blue) The 2000-2009 bear market, an expanded flat, is labeled as wave a (or w) of a much larger correction. The 2009-2011 rebound, the Hope Rally, is wave b (or x). A wave c (or y) decline is in progress and is likely to push the market to new lows in a proportionate three wave structure.

(red) The 2000-2009 bear market is an incomplete expanded flat with the 2009 low as wave [1]-down of wave c-down. The 2009-2011 rebound, the Hope Rally, is [2]-up of c-down. Wave [3]-down is in progress, which is likely to be large and forceful.