Saturday, September 11, 2010

MTU Weekend Ed. - Moment of Truth (9/10/10 Close)

Implications of a move above the August high
… and practically the June high in many indices

With respect to potential long term market trajectories, the August high and practically the June high in many indices are likely important.

If the market takes out the August high, the (perceived) likelihood of either that the advance since the 2009 low is not complete (Chart 1) or that intermediate wave (1) of P[3]-down is a 3-3-3-3-3 leading diagonal (Chart 2) increases significantly (which will likely reduce the magnitude of wave (1) accordingly).

If one examines the 5s and 3s since the April high to date, one would conclude that the likelihood of the current advance being the final part of minor 2-up within the context of a primary wave [3]-down is low although one cannot exclude this possibility.

If the August high is breached, the wave structure since the April high (as interpreted within the context of a primary wave decline) is better counted as 3-down and 3-up (e.g. Chart 3). This implies that the anticipated intermediate wave (1) decline will be a LD. This will also create maximum confusion for the both the P[3]-up and the P[3]-down crowd.

But the market needs to take out the August high first, which is associated with significant resistance – the overhead 200-day moving average line, a 4-month downward trend line, and a still viable P[3] wave count, and the possibility that the Russell 2000 index has already topped (see below).

On the way to beyond the August high, an immediately pullback to the 1090-area in SPX is a distinct possibility, although not required with the bullish possibilities of an ascending triangle in the senior indices and a regular triangle in the RUT. See discussions on Bullish Squiggles below.

A still viable P[3] wave count – the August high most likely needs to hold

Chart 4 shows the most likely corrective and impulsive wave structures since the April high for Wilshire 5000, SP500, DJ30, Nasdaq Composite on the 60-minute scale. From this perspective, it is clear that a peak beyond the August high is best labeled as (B)-flat / double-three or even something more bullish.

For the time being, as highlighted in Chart 4, the current rebound being minute wave [ii] of minor wave 3-down (or B-up of (C)-down) is a very respectable possibility. If the labels in Chart 4 are too small to read, one can refer to those in Chart 3 above.

Under the bearish P[3] interpretation, minute wave [ii]-up should end over the next few days if not already. Chart 5 offers squiggle counts on Wilshire 5000, SP500, DJ30, Nasdaq Composite on the 10-minute scale.

RUT leads the decline?

It’s possible that the Russell 2000 index (RUT) is leading the market during this early stage of P[3], just as it had done in 2007 at the start of P[1]. This time, RUT had rolled over before the August high and rebounded before the September low. It just may have rolled over before the September high (Chart 6). To push the wave count, it is possible that the current rebound is one degree smaller in RUT as indicated in Chart 6, i.e. (ii) of [iii] of 3-down instead of [ii] of 3-down. Chart 7 offers a squiggle count of the most recent advance.

Bullish squiggles
Assuming that the August high will not hold, Chart 8 presents a host of bullish counts from the late August low in SPX. The uncertainties lie with where wave (iv) or wave [b] end. Each color-paired label indicate potential locations for wave (iv)/[b] and the corresponding wave (v)[i] or [c].

For the near term, the most bearish count (blue) is that a five wave advance has ended on Friday (allowing for a tiny squiggle high on Monday).

For the near term, the most bullish count (orange, no question mark) is that a large triangle wave [b] ended on Friday. A multi-day/week wave [c]-up has just started.

The green labeled count is in between, and the red labeled count suggests that a pull back is already in progress (likely in the form of a flat or double three).