Friday, October 15, 2010

MTU Weekend Ed. - Potential reversals in the USD and Bonds, Will Stocks Follow?

In all likelihood, the USD index bottomed on Friday (Chart 1 and Chart 2) and long-dated Treasuries did top a week ago (Chart 3 and Chart 4). Please refer to “Dollar Bottoming and Risk Assets Topping (10/8/10)” for a detailed discussion.

USD Index
10Y U.S. Treasury Yield Index

Meanwhile, the Nasdaq 100 Index (NDX) has not only become the first major index to conquer its April high on increasing volume, but also the first candidate with a 88.4% retrace to challenge its 2007 top (Chart 5).

Will stocks follow the lead of NDX higher or reverse course along with dollar and bonds? The answer may be yes and yes. This week, we revisit the big picture wave counts which have now become much more relevant than the analysis of small-degree structures.

First of all, here are the conclusions.
[A] The March 2009 low is still less likely to be the start of a new bull market.
[B] The multi-year bear market since the 2000 orthodox top or the 2007 nominal top is likely incomplete.
(a) The hope rally since March 2009 is incomplete - increasing likelihood.
(b) The rest of the market diverges from NDX and experiences an immediate reversal - decreasing likelihood.
[C] If more indices exceed their April highs and Nasdaq exceeds its 2007 high, the decline from the 2007 top is likely a three and likely ended at the orthodox low in 2008 - around the level where Mr. Prechter suggested to take profit on short exposure.
[D] The wave structure of stocks in terms of gold will offer helpful perspective in the meantime.

Here are the details.
[A] The March 2009 low is still less likely to be the start of a new bull market (say V of (V) of [III]).

One key reason from a EWP perspective is that NDX and COMPQ do not have the right appearance to have ended the entire correction around 2009. Even with a plausible zigzag count (Chart 6), wave [C] of the 2000-2009 correction is unusually small with respect to wave [A] at 42.6% for COMPQ and 32.7% for NDX. Moreover, the proposed wave [C] has also failed to make a nominal low in these indices.

The bull market interpretation requires the assumption of a huge divergence between Nasdaq indices and the rest of the market which is possible but unlikely.

[B] The multi-year bear market since the 2000 orthodox top or the 2007 nominal top is incomplete. This scenario implies large swings at best (e.g. triangle) and sizable declines at worst (e.g. a sell-off to below March 2009 lows). We have two possibilities within this bearish interpretation.
(a) The hope rally since March 2009 is incomplete - increasing likelihood. The proposed wave structure is shown in Chart 7 (NDX or COMPQ) and Chart 8 (SPX). Please also refer to discussions in Unfinished Business (10/8/10) for a slightly less bullish structure where the minimum requirement or a top has already been satisfied.


(b) The rest of the market diverges from NDX and experiences an immediate reversal - decreasing likelihood.

Under this interpretation, the top should be already in or nearly in and the April high should hold for the remaining indices. Since NDX is the narrowest index within the pack, the proposed divergence is probable and tolerable.

The red-labeled count in Chart 9 (SPX Dec E-mini) tracks the decline since the recent high as a nested 1s2s assuming the top is in. The green- and pink-labeled counts in Chart 10 (SPX) present two counts calling for a top within a week or two.


[C] If more indices exceed their April highs and Nasdaq exceeds its 2007 high, the decline from the 2007 top is likely a three (Chart 8 above) and likely ended at the orthodox low in 2008 - around the level where Mr. Prechter suggested to take profit on short exposure.

The implication is that
(a) The entire decline since the 2007 peak in SPX/INDU/WLSH to the future low is likely an 3-3-3-3-3 ED.
(b) The "ultimate" low will likely be less extreme as ones currently proposed by Mr. Prechter.

[D] The wave structure of stocks in terms of gold will offer helpful perspective in the meantime, particularly for the permabulls, the permabears or the confused. Chart 11 updates and the discuss about stocks in gold in Dollar Bottoming and Risk Assets Topping (10/8/10) remain applicable.
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