Friday, March 12, 2010

MTU Weekend Ed.- The small caps point the way (3/12/10 Close)

Bottom line: Odds favor a meaningful sell-off in stocks once the advance since the Feb 5th low runs its course. The upside potential is moderate at best.

Most major U.S. stock indices, with the exception of the Dow, have made new recovery highs. Expect the Dow to do the same soon. In the very near term, there is additional near term upside potential in the advance since the Feb 25th low, based on intraday counts. A small degree fifth wave is currently extending. However, the upside potential is moderate at best and odds favor a meaningful pullback with substantial additional bearish potential.

Note that with the new recovery high, the Russell 2000 index has exhibited a nicely formed triple three or a double three with a large final ending diagonal (my primary count) since the March 2009 low (Chart 1). These potential corrective structures lend support to the view that the current rally is a counter-trend rebound within a larger bear market. In fact, a double three with a final diagonal triangle (which is contracting in the RUT and expanding in other indices) offers simplicity and describes the wave structure of all indices well. For example, Chart 2 illustrates the double three structure with an expanding diagonal triangle in the SPX.

Most big picture counts point to at least a meaningful pullback ahead, even by the most bullish count. For example, Chart 3 to 5 reflect and update the scenarios discussed in An EW Roadmap (3/5/10). Please see comments on these charts which outline the underlying logic.

There's one immediately bullish exception. This is a low probability scenario in my view, but is worth monitoring. The 2/5/10 low could marks the end of the primary wave [X]-down of cycle wave x-up which takes on the form w-x-y(-z). Please see the alt2(bullish) count in the Russell 2000 (Chart 1) and the Bearish Count w-x-y (Chart 4).

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