Friday, July 27, 2012

MTU Weekend Ed. - Breaking (7/27/12 Close)

No more waiting. Given the strong surge in U.S. stocks off the lows of a sharp prior decline, the 2012 range (about 1270 to 1420 in SP500) is now most likely to be breached next - according to the development of the wave structure since the early June low.

The SP500 index has now recaptured its long term support, favoring an upward breakout.  However, inter-market divergence and market internals argue the opposite and suggest caution. It is prudent to be mindful of both scenarios (see below).

On the bullish side, this past week’s surge is likely a powerful third wave as indicated in Chart 1-blue.

From the perspective of the entire Hope Rally, the market is on its way to the black label number 5 of the green count or the blue count in Chart 2. Please see prior weekly commentaries for a discussion of this roadmap for the Hope Rally.

Taking a long term view, one notes that SP500 has again conquered its decade-long support/resistance area after multiple failed attempts in the recent past (Chart 3).

On the bearish side, the rebound since the early June low counts well as a corrective double three as long as the 2012 high remains intact (Chart 1-red/gray).

Moreover, in spite of the optimism in large cap indexes, there’s far less exuberance in smaller cap indexes which are lagging (Chart 4).

Finally, there's apparent weakness in market internals.  For example, the advance/decline line associated with SP500 index constituents has so far failed to make a higher high as did the SP500 index.  The negative divergence is easy to spot in Chart 5