Saturday, December 1, 2012

MTU Weekend Ed. - Triple screen, Hope rally and Fractal extrapolation (11/30/12 Close)

The final upswing of the Hope Rally is likely in progress (see Upswing (11/23/12)). After a brief dip to 1385 (MA200) this past week, SP500 rose to as high as 1420. We take a triple screen of SP500 charts (from monthly to daily) to offer a perspective. We continue to track the fractal discussed in Post Election Plunge (11/9/12) for a potential and tradable retrace from near current levels. Finally, we examine the bearish count based on a completed Hope Rally or a downward correction still in progress. The market is now approaching overhead resistance (around 1425-1435 in SP500.)

Triple Screen, Hope Rally
The monthly chart on SP500 (Chart 1) presents the secular bear market since the Y2K top, which we think is still in progress. Under this interpretation, the Hope Rally since the 2009 low (marked as wave b-up) is likely concluding. An interesting possibility is the highlighted ending diagonal triangle. It would be a fitting scenario as it would coincide with the terminal wave of the Hope Rally. The potential wedge is speculative at this moment, but is worth monitoring.

In the context of our Hope Rally model, we label the advance since the November low as an upswing to point #7 at the right edge of the chart - will it truncate? See Chart 2 (SP500 weekly). At the same time, we keep an eye on the possibility that the Hope Rally had ended at point #5 or point #6 still requires one more retrace.

From a technical analysis perspective, SP500 successfully retested MA200 this past week. It has also risen above the prior neckline resistance (now turning into potential support) and is approaching the overhead MA50 resistance. See Chart 3 (SP500 daily). From levels around MA50, a retest of the neckline, prior downward trend line and even the MA200 remains likely. See the discussion on the potential fractal below.

Fractal extrapolation
Chart 3 above also tracks the potential fractal discussed in Post Election Plunge (11/9/12). The downswing from point #8 to point #9 in 2011 occurred shortly after the market had captured the prior neckline and the key moving averages.  At the present time, these conditions are effectively met.  What remains to be seen is if SP500 can also capture the upper channel and the corresponding point #6 around 1435 this time around. If history rhymes, the proposed retrace can be expected any day now.  Also note how deep the retrace to point #9 was in 2011.

Outright bearish counts
What if the Hope Rally was already over? Note that the September high does offer a logical point for the wave-count top (Chart 2) as we have discussed before. Even under the bullish view, what if the correction from the September high requires one more retrace?

From a bearish perspective, the sell-off to the November low is potentially a leading diagonal or odd-shaped impulse wave (wave 1 or A) from an orthodox high in SP500 (Chart 4, red count) and a nominal high in the Dow. Once again, the subsequent rebound (wave 2 or B) is approaching its typical price target. Chart 5 (red count) presents the corresponding profile in NDX.