Friday, June 22, 2012

MTU Weekend Ed. - Retesting or Rolling Over (6/22/12 Close)

U.S. stocks turned sharply lower this past week after having retraced around 0.618Fib with respect to the May-June sell-off and retested their prior break-down levels (Chart 1 pink and Chart 2).

The key question - Is Thursday’s plunge the start of the next major downward swing (Chart 1 pink) or just a sharp retest of its recent breakout area (Chart 1 green and blue)?  It’s difficult to assess the odds at the moment (see below), with odds moderately favor the bearish view for the near term. 

That said, the risk/reward profile can be attractive if one is to fade a further rebound given the sharp and sizable reversals in May and over the past week, provided that (1) the rebound is corrective (2) a hard stop is set at the recent high of 1363.45 in SP500 and (3) a prudent position size is adopted. See Chart 3 for a squiggle count.

The 2.86% “plunge” from the rebound high of 1363.46 to Thursday’s low of 1324.41 in SP500 exhibits interesting technical features.

The sell-off supports the bearish case, as it reverses a visual three-wave rebound (Chart 2), which is bearish.

However, there is a decent bullish case to be made.
[1] It retraced around the 0.382-Fib of the upswing from the June 4th low and around the 0.618-Feb of the advance since the June 13th low following a week-long consolidation.

[2] With Friday’s 0.72% rebound, it has so far successfully retested the upper end of this consolidation zone. This is especially the case if there’s follow-through buying next week.
[3] While lacking the ideal look, the rebound off the June low to the recent high can be counted as a five-wave advance with a lengthy fourth wave (Chart 4, green).

From this perspective, the recent sell-off merely retested the prior 4th wave of a lesser degree - a typical feature of a correction. The recent sell-off is either [a]-down of wave 2 (deep) or the entire wave 2 (shallow).