Saturday, February 16, 2013

MTU Weekend Ed. - 7UP and Mature Fractal (2/15/13)

SP500 crawled up another 0.12% over the past week, including a fresh recovery high to 1524.69 on Feb 13th. Stocks, while taking their time, are on track to complete the proposed final upswing of the Hope Rally (Chart 1).

The proposed final upswing likely commenced at the November low (black point 6 in Chart 1). If it is a three-legger (ABC) structure, it is likely approaching its end. If it is a regular five-wave structure, it likely is missing wave 4-down and wave 5-up. There is the possibility that wave 4-down is already in progress with a potential upward bias.

The small-degree price fluctuations over the recent weeks do not alter the larger degree profile that we have a seven-overlapping-wave advance since the major low in 2011 (Chart 2, black). Based on EWP, an overlapping seven-wave structure is likely corrective, is complete when the final upswing is complete, and is likely to be followed by a major (higher degree) reversal. If so, it should coincide nicely with the end of the Hope Rally. In terms of wave labeling, an ABC-(X)-ABC structure appears to be reasonable (Chart 2, red). Furthermore, each of these 7 waves is potentially a three wave structure itself, as labeled.

A Mature Fractal
Recall that the fractal in Chart 3 has helped us navigate major swings in the 2nd half of 2011. The potential fractal had afforded us the insight that the November low is potentially point 6 of the Hope Rally (Chart 1) and the December pullback is likely only an interim correction within the upswing to point 7 of the Hope Rally (Chart 1).

At current levels, an interesting price relationship suggests that the market may be approaching point 10 of the fractal (Chart 3). Note that during the 2011-2012 window, point 8 sits around the Fib 0.382 division point with respect to the distance from point 7 to point 10.

During the present 2012-2013 window, point 8 is again around the Fib 0.382 division point (Chart 4), suggesting a mature upswing if the proposed fractal continues to track. 

However, SP500 did exceed the fractal-projected top by about 10 index points at its recent high. How does one reconcile this discrepancy? We offer three reasonable scenarios.

(1) Extrapolating the proposed fractal to point 10 is a stretch. The proposed fractal no longer tracks.
(2) The projected pattern likely only rhymes with, but does not exactly track the past pattern. Thus, a minor "misalignment" is within "model" tolerance. It's prudent to heed the message embedded in the larger degree pattern.
(3) In 2012, a small-degree 5th wave experienced truncation (Chart 3) whereas the current small-degree 5th wave does not suffer from truncation. This subtle difference in the wave structure explains the discrepancy and brings the two cycles into alignment.