Friday, May 9, 2014

MTU Weekend Ed. - Fractured Markets and Potential Fractals (5/9/14 Close)

This past week, the Dow Transports made a new all-time high while the Russell 2000 dipped to a lower low. The SP500 moved along a potential bullish-inverse-head-and-double-shoulders pattern while the Nasdaq 100 did same along a potential bearish-head-and-shoulders pattern, each having managed an inside week.  These are indeed fractured markets (Chart 1). Complacent markets too, as implied vol is again rather low.

Barring an immediate sell-off from a potential truncated high (Chart 1 red), odds appear to continue to favor new highs, perhaps to complete a proposed ending diagonal triangle in SP500 (Chart 2).  Specifically, there's room to interpret the bearish price patterns in some indexes as ending moves of a correction at the moment, which then are in sync with with those bullish price patterns in other indexes. See below.

The potential bullish-inverse-head-and-double-shoulders pattern in SP500 remains on track. See Chart 3 and our analysis in Monthly Outlook Update (5/2/14).  Near term bullish and bearish tracking counts are shown in Chart 1.

Monthly Outlook Update (5/2/14) shows a historical precedence of this pattern that had failed miserably, i.e., the 2011 top (Chart 4).

Our reader "socratease" points out another historical precedence of this pattern that had succeeded beyond expectation, i.e. the Dow between mid-1960s to early 1980s (Chart 5). When we map the SP500 into Dow during that period, our model suggests that

If the bullish pattern plays out, SP500 is likely to reach a breakout high of 1925 either next week or the week after, before a retest of the neck line is likely to take place. Note that the breakout of the Dow in early 1980s proceeded to extend upward and the Dow never looked back. However, we cannot expect the SP500 to do the same, before a retest has proven successful.

Nasdaq 100
NDX is now sitting on top of a potential bearish-head-and-shoulders pattern (Chart 6). If the pattern plays out, the measured target for the initial decline would represent a 13% sell-off from current levels.

However, the bearish H&S pattern can fail as there is a reasonable bullish interpretation of the price structure in not one, but two time frames (wave degrees).  Chart 7 shows two corrective counts of the recent decline in NDX, a simple zigzag or a zigzag A-B-triangle C structure.  The count in Chart 6 shows how this potential small-degree correction can fit into the larger picture as a 4th wave.

Russell 2000
The 10% sell-off in the Russell 2000 index from its 2014 high can be counted as a leading diagonal triangle, hence a high quality decline from a bearish perspective (Chart 8). Once again, there is a reasonable bullish interpretation of the price structure in a couple of time frames (wave degrees). On a smaller scale, the sell-off can be counted as a corrective triple zigzag.  On a larger scale, it's possible to count the recent pullback as a 4th wave (Chart 8).