Friday, May 28, 2010

MTU Weekend Ed - A Corrective Rebound (5/28/10 Close)

The U.S. stock market has delivered its worst month of May performance since 1940. The S&P500 index dropped 8.198% in May and fell 14.676% from the 4/26 high to the 5/25 low.

Moreover, this initial decline from the April top finally managed to take out the February lows in broad-market indices on 5/25. This development confirms that the current decline corrects a larger prior advance, at least the advance since the Mar09 low and probably a lot more.

Sharp rallies from time to time notwithstanding, the sell-off is far from over whether our interpretation of a primary degree decline is on track, or if the decline from the April high is part of a larger correction.

From an objective EW perspective, the 5/25 low may be labeled as one of the following.
* Within the bearish primary wave 3-down count (Chart 1), wave [i] of 3 of (1) OR wave [iii] of 1 of (1) where wave 1-down is a leading diagonal OR wave 1 of (1).
* Within the very bullish primary wave [5]V(V)[III] count (Chart 2), wave W or wave [iii] of A of intermediate wave (2).
* Within the moderately bullish cycle wave a of super cycle wave (b) count, wave (W) or wave 3 of (A) of primary wave [B] (Chart 3).

While I place dominant odds on the bearish primary wave 3-down scenario, each of the above counts also suggests that the 5/25 low is unlikely to hold.

For the near term, the rebound since the 5/25 low has traced out a typical A-B-C corrective structure and has met the retracement price target and minimum retracement time target. Friday's high could be the end of the rebound or there could be one more advance before the market rolls over again.

I am sympathetic to one more advance, as the initial sell-off from Friday’s high counts as 7 waves if we do not entertain more exotic wave structures (such as a 5-wave down plus an expanded flat). The 5/26 low of 1065.59 in SPX needs to hold if one more brief advance is in the cards. The advance could possibly challenge the 1067.26-1171.58 opening gap in the SP500 cash index on 5/21 (Chart 4).

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