MTU Weekend Ed. - Head and Shoulders (8/16/13 close)

The sell-off over the past week in SP500 has fulfilled a well-formed head-and-shoulders pattern to the measured-move target levels (Chart 1). While Chart 1 indicates two gaps on the run-up since the June low in SP500 are yet to be filled, the corresponding gaps in the Dow have already been filled. As far as gaps are concerned, the sell-off has now left an unfilled overhead gap around the 1680 level which could attract prices in the case of a rebound. Technical indicators are showing positive divergence with prices at the 30-min timeframe. There’s potential support around the 50-day moving average in SP500. It’s probable that a short term low is in sight. How much strength a potential rebound can muster remains to be seen.

Wave counts offer several key scenarios:  the end of the Hope Rally, a major pullback in a bullish wave five since the 2009 low, or an extension of the post June advance to new highs.  Each scenario is plausible, but also not without its challenges from a wave count perspective.

The end of the Hope Rally 
Chart 2 counts the Hope Rally as a simple zigzag with a flat-like connecting structure. Chart 3 offers a more detailed count of the proposed five-wave advance since the 2011 low.

A major pullback in a bullish wave five since the 2009 low

Recent new all time highs in leading indexes make the Hope Rally since the 2009 low being a large fifth wave more likely than before.  Under this interpretation, we track SP500 at wave 3 of (3) of [3] of a regular five-wave advance (Chart 4 green) or wave [C] of a potential ending diagonal triangle (Chart 4 red).   The proposed EDT shows a better form in semi-log scale (Chart 5), where a potential wave [D] test of the 2009/2011 trend line appears likely.

An extension of the post June advance to new highs

The upswing since the June low may be extending with the past week's sell-off as a second wave pullback.  To date, the sell-off is three waves, fitting an ABC structure.  SP500 has retraced around fib-382 and the Dow has retraced around fib-618.  See Chart 1 above.

With respect to a larger degree count, the proposed extension extends wave (5) in Chart 3 and wave [v] of 3 in Chart 4.

At an even larger degree, the proposed extension serves as a successful test of the long term breakout area in SP500 (Chart 6).