Saturday, August 22, 2015

MTU Weekend Ed. - Correction (8/21/2015)

The recent “plunge” in stocks confirmed a correction against the 2014 low and raised the likelihood of a larger-degree correction (particularly with respect to the late 2011 low). As of Friday’s low, SP500 is down 7.59% from its all-time high and the Dow is 10.31% off its May high.

Based on the price structure of the Dow transports (Chart 1), recent weakness in stocks is likely a wave (4) correction with respect to the 2011 low (Chart 4 gray or blue) and price is at initial support. Under this interpretation, the next upswing completes wave (5) of [3].

Furthermore, this 2015 pullback in SP500 so far resembles its 2011 pullback where a potential bullish triangle had failed.  Price is at potential support according to this similarity.  See Chart 2 and Chart 3

As we have discussed in recent weeks, a meaningful pullback likely sets a better footing for the next upswing.

Chart 4 considers the current decline in SP500. Since the initial decline from its all-time high is a visual three waves (see Chart 6), the sell-off (which has ample potential) is likely corrective, despite the technical damage it has already inflicted.

blue wave (4) - with respect to the 2011 low is a flat-like structure. While transports are at their initial channel support, SP500 is just approaching its mid-channel support and has met minimum retracement requirement when wave c fell below 2019.26, especially if a running flat-like structure (Chart 5, green) is developing (which is not unlikely considering other tracking counts).  Otherwise the prior wave 4 area (1737.92-1850.84) is fair game. Under this interpretation, the next upswing completes wave (5) of [3].

purple wave[4]* - with respect to the 2009 bottom is an asymmetric triangle dating back to the green wave [3] at the end of 2013. The lower boundary line is currently at 1925 and rising.

green wave (2) - is correcting the green wave (1) advance since the October 2014 green wave [4] low. From the all-time high in May, there have been 7 waves during the decline, which suggests that an end is in sight (Chart 6). Furthermore, since wave (1) can be counted as a leading diagonal triangle under this interpretation, the breach of its wave [b] low (1980.90) as well as a 50% retracement could signal a retracement low. If the sell-off continues, the unfilled gap (1905.03-1909.38) presents a reasonable, but a deep, perhaps a too deep a, retracement target.

gray wave (4) - with respect to the 2011 low.  The gray count is similar to the green count, except for an extended wave (3) of [3],  which terminated in 2015.   Under this interpretation, the next upswing completes wave (5) of [3].