MTU Weekend Ed. - Break Out (9/7/12 Close)

SP500, along with Wilshire5000 and Nasdaq indexes made fresh Hope Rally highs this past week. The final advance toward the black point number 5 based on our Hope Rally model is likely in progress (Chart 1). Furthermore, a breakout from key 2011-2012 resistances is also in progress (Chart 2).



From a wave perspective, the current advance is likely wave 5 (which is terminal) with respect to the June low (Chart 3). The end of the advance coincides with the black point number 5 in our Hope Rally model.



With the breakout, the key questions are
(1) Where (and when) is the proposed wave 5 likely to end?
(2) Would the associated black point number 5 complete the Hope Rally or are there point-6-down and point-7-up to follow?

As discussed in Hope Rally Update (8/31/12), a potential timing of the black point number 5 is likely early October (+/-). With the current advance now getting overbought, the pending high is likely in the vicinity of current levels and unlikely to make it to an all-time high. Whether wave 5 extends remains to be seen.

Since key support / invalidation point of the current advance is clearly around 1395-1400, it’s prudent to focus on the downside risks.

[1] The breakout is yet to be confirmed by the Dow, mid-caps (SP400) , small caps (Russell 2000) and transports.
[2] The negative divergence with respect to market internals continues to exist (Chart 4 above).
[3] Realized volatility (not implied) is getting “extremely” low.
[4] NDX is again at trend-channel resistance and the current advance can be interpreted as terminal within its long term wave structure (Chart 5, blue).