Friday, March 2, 2012

MTU Weekend Ed. - Base Channel (3/2/12 Close)

Update -  Breadth numbers within the SP500 index have finally been showing a multi-week negative divergence.  The following chart shows the advance-decline line for SP500 components.

Original post - 
SPX was up 0.28% this past week. While there are interesting bullish/bearish profiles in U.S. stocks' wave structures on the squiggle level or from a longer term perspective (see Chart 3 and Chart 4 in  Rolling Over (2/24/12)), the intermediate term picture points to a complacent market that is about to roll over.

intermediate term outlook
The impulse wave advance from at least the December 2011 low is wrapping up its final subdivisions (Chart 1, ES).  Wave labeling aside and despite the 2.5-month-long buy-the-dip mentality, SPX is yet to break free of various logical EW base channels.  This channeling feature lends some support to the possibility that the recovery since the October 2011 low is a corrective A-B-C structure.

Meanwhile, we emphasize again the observation made in Squeezed (1/27/12) and update the corresponding charts. "While the low levels of implied volatility has been justified by declining realized volatility, current VIX levels leave little margin of safety." (Chart 2) The 20-day realized volatility remains in a range where past major tops were made (Chart 3).

near term outlook
Chart 4 shows a potential final subdivision, likely a small-degree fifth wave, from the mid-February low in ES.  The blue count shows a completed regular five wave advance.  The red count shows a contracting ending diagonal triangle which could allow a final overthrow - capped at 1384 basis March e-mini.

Chart 5 shows the wave structure in SPX since its recent high on 2/29/12.  There are numerous possibilities subject to further development.  These possibilities are color coded.  The green count shows the most (immediately) bullish path with a small-degree wave 3/C already in progress.  The red count shows the most bearish path with a leading diagonal triangle decline off an orthodox high made on 3/2/12.