Friday, February 10, 2012

MTU Weekend Ed. - NDX points the way (2/10/12 Close)

P.S. Latest Barron's cover: Dow 15,000

Bottom line -
[1] The past week has the potential to be monumental - new recovery highs in select stock indexes but no net advances by the end of the week.
[2] The potential upward breakout of the VIX index  foreshadows the downside potential in stocks.
[3] Wave structures in the Nasdaq 100 index shed light on where the market stands within various cycles.

The past week has the potential to be monumental. The Dow and the Nasdaq Composite (including NDX) made impressive new recovery highs since their 2008/2009 troughs. Yet major U.S. stock market indexes made no net advances by the end of the week. With the exception of the Nasdaq 100 index which gained 18.15 index points (+72bp), SP500, the Dow and the Nasdaq Composite lost 2.26, 61 and 1.78 index points respectively.

Friday’s decline has the potential to start a meaningful downward swing (Chart 1 and Chart 2). The January 30th low, which is around 5% below recent highs in various indexes, is a reasonable target and re-evaluation point (See discussions on NDX below).

Moreover, perhaps the potential upward breakout of the VIX index  (Chart 3 to the right) is foreshadowing the downside potential in stocks.  In Downgrades, QE3 and Top Tick (1/13/12), we observed that "the recent upswing in stock markets (in U.S. and Europe), reduction in risk premia (in European bonds and SP500 VIX, etc), and the muted reaction to alerts of imminent downgrades Friday are likely indications of risk being priced out rather than in."  The market may be righting its course.

NDX points the way
At this juncture, perhaps the Nasdaq 100 index (NDX) is one of the best candidates to shed some light on where the market stands within various cycles - near term, intermediate term and long term.

The weekly chart (Chart 4) shows that NDX is potentially wrapping up a corrective wave b advance since its 2002 low in the form of an upward flat (blue) or the initial impulse advance of a new bullish cycle off the 2008/2009 low (green).

The daily chart (Chart 5) shows that the volatile 2011 is a complex wave (4) under this interpretation.  Wave (4) either ended at the December low (blue) or November low (green).

The 30-minute chart (Chart 6) offers a detailed count on the advance since the December low.  The 10-minute chart (Chart 7) zooms in on the wave structure since January 30th.  The potential for a downward reversal is evident based on the blue count in Chart 6 and Chart 7.  The gray count suggests one more push higher. Dropping below Friday's low offers initial confirmation of the end of the post-December advance/wave as the proposed gray wave (iv) and wave (i) would likely overlap in NDX.

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