Saturday, August 16, 2014

MTU Weekend Ed. - Tracking the Rebound (8/15/14)

SP500 rebounded and filled the nearest gap around 1935 as expected. Friday saw a swift 20-point drop from the rebound high of 1964.04 and the subsequent intraday recovery reached a 0.618-Fib retrace of the drop. What are the chances that the rebound from the early August low is over?

On balance, odds appear to favor a fill of the middle gap (1965.14) – whether immediate or delayed – given the strength in the Nasdaq indexes, technical upside potential in SPX, and a potential rebound in the German DAX.

Here are some details.

*** Friday's intraday sell-off
Friday’s intraday reversal was as much technically driven as news driven, if not more. Therefore, it’s also prudent to put rebound-stopping fundamentals into a proper technical perspective.

Friday’s high of 1964.04 missed the middle gap (1965.14) by a single index point. It may reflect the waning strength of the rebound and/or strong sell orders at technical levels. To wit, Friday high was 5.7 points above the Fib. 0.618 retrace level of the prior sell-off. Friday’s reversal also took place where SPX kissed a key trend line through the Feb-Apr lows. See Chart 1 where the larger tracking counts remain unchanged.

However, the wave structure of Friday’s intraday reversal is ambiguous. A break of the 20-point range is necessary for resolution. Chart 2 illustrates.
[green-bullish] a double zigzag or a zigzag with a triangle mid-wave from the nominal high to the nominal low
[blue-bullish] a zigzag to the orthodox low with a lengthy triangle mid-wave
[red-bearish] an initial decline followed by an upward expanded flat rebound to the 0.618 Fib retrace level.

*** Tracking the rebound in SP500
Chart 3 updates the key rebound scenarios discussed in Rebound, Gap Fill (8/8/14). We make the following observations.

[red 2/B] If the rebound is the red wave 2, it should ideally have ended at Friday’s high given that NDX was effectively at the prior high. (Chart 4).  Under this interpretation, one expects an immediate sell-off, with the possibility of a waterfall decline.

[green truncated fifth wave OR blue (X)] The rebound could be a diagonal triangle. From a bullish perspective, it could be the entire bullish fifth wave (where NDX makes a new high but SPX fails) OR wave one of an extended fifth wave. From a bearish perspective, it counts as wave C-up of wave (X)-up.  In this case, the middle gap should be filled but to be followed by at least a quick pullback shortly after. 

[green] A series of 1s and 2s which describes an extended fifth wave to new highs.

*** A potential rebound in German DAX
Despite the technical damages recent sell-off in German DAX has inflicted (such as a fresh 2014 low, a breach of both the 50- and 200-day moving averages, and DAX barely defending the 9000 level), a rebound may be coming soon or is already in progress based on its short term wave structure (Chart 5).

[blue] A five-wave drop, where wave four is a skewed triangle, ended in early August.  The proposed rebound is in progress.  Friday's high touched the 0.382-Fib retrace level.  The rebound likely has more upside potential to north of 9500.

[red] A five-wave decline from the high is still in progress. Friday's high is wave (iv) (or wave iv of (iii)).  Further subdivision lower is necessary before a meaningful rebound would materialize.  With wave (iii) already extended, wave iv/(iv) and v/(v) are likely a broad retest of the 8900 zone.  An interesting scenario is a truncated fifth wave based on wave one-five equality as indicated by the green arrow.

Chart 6 updates the bullish DAX/RUT count discussed in Rebound, Gap Fill (8/8/14).