Friday, August 13, 2010

MTU Weekend Ed. - You Are Here (update 1) (8/13/10 Close)

Long term (multi-year) outlook –
Two long term stock market scenarios/counts have been extremely relevant in today’s market, in my view. Ironically, one is very bearish and the other is quite bullish. At the moment, odds favor the very bearish count.

I’ve discussed these long term scenarios in the past - A Primary Degree Top (5/7/10), for example – and will continue to monitor, refine and update them.

The bearish scenario (Chart 1) has the market decline (potentially meaningfully) below the March 2009 low over the next few years. In EW terms, this scenario has the Y2K top as a grand super cycle wave top. The multi-year expanded flat crash (as super cycle wave (a)-down) has years left before it is done. Moreover, the next primary degree phase of sell-off most likely has just started.

The bullish scenario (Chart 2) sees a multi-year bottom at the March 2009 low and projects a multi-year advance to new all time highs before the kind of collapse depicted in the bearish scenario actually starts. In EW terms, the March 2009 low is the end of cycle wave IV-down of super cycle wave (V)-up of a grand super cycle wave top. This super cycle wave (V)-up began after the 1930s crash.

These counts have their respective intuition and technical merits and are worth keeping a close eye on. At the moment, odds favor the bearish count (Chart 3). I’ve discussed some of the supporting market dynamics for the bearish count in You Are Here (7/2/10).

Furthermore, the so-called “death cross” (where 50-day MA drops below 200-day MA) occurred this July and the Hindenburg Omen (which is a set of conditions that greatly increases the odds of a large sell-off when they are met) got triggered this week. Note that the last “death cross” occurred in December 2008 and both the “death cross” and the Hindenburg Omen signal have also been reported by the Wall Street Journal this time.

Last but not least, we have a nice looking impulse wave reversal up in the USD index.

Medium term (multi-month) outlook –
Both the bearish and the bullish counts point to a decline to fresh 2010 lows (Chart 4). This decline has most likely started at last Monday’s high. If so, last Monday’s high is the top of minor wave 2-up of intermediate wave (1)-down under the bearish count or intermediate wave (B)-up of primary wave [2]-down under the bullish count.

It’s possible to have one final advance in 2-up or (B)-up to about 1150 in SPX (per the blue labeled count in Chart 4), but the likelihood is lower.

Short term (multi-day) outlook –
While the cash indexes (e.g. the SP500 and the Dow) count better with another subminuette wave v decline to complete minuette wave (i)-down, it’s more likely that minuette wave (i)-down was complete during overnight trading in the futures market (Chart 5). The upside potential for minuette wave (ii)-up is around 1100 in SPX, perhaps a lot less.

Appendix - Long Term Gold Count update