Saturday, February 12, 2011

MTU Weekend Ed. - Logical Ending Points (2/11/11)

In the context of the increasing (if not dominant) possibility that this stock market rally is an x-wave – see A Potential x Wave (2/4/11)

We must recognize the reality
(1) that this rally is no longer bound by the prior high, and
(2) that this rally can end at any one of the logical peaks either below or above the prior high.

From a EWP perspective, the best we can do is
(1) to analyze each large wave structure one at a time, and
(2) to identify candidate peaks as potential logical ending points to the proposed wave x.

Over the course of the proposed wave x, prior potential logical ending points are peaks in October 2009 and January 2010.

The coming peak, when the advance since the November 2010 low is complete, represents another logical end of the proposed wave x. At the moment, residual near term upside exists as (1) the advance since the 1/28/11 low is still subdividing higher (Chart 1) and (2) the DJ transport average, which has a good chance of confirming the new high in INDU, needs to do so.

However, the upside potential is likely capped at 1341.78 in SPX if the count in Chart 2 is correct, as wave (iii) of [v] is shorter than wave (i) of [v]. Note that the proposed cap is less than 1% away from Friday's close.

The major competing bullish counts consider minor wave 3 since the July low as extending. These counts are highlighted by the green and red labels in Chart 3. Wave structures in NDX and RUT and better channeling within the advance since the Nov'10 low appear to support this interpretation. Net net, the area around the Jan'11 low becomes an important support zone or an initial trend reversal confirmation zone.

From a technical analysis perspective, Friday’s high of 1330.79 and close of 1329.15 in SPX barely cleared the 10-year resistance zone discussed in last week’s update (Chart 4). It’s now up to the bullish forces to transform the 1313-1327 area into a support zone for any sustained upside potential.

Appendix -
Rhyming with Q2 of 2008 at a larger degree? 4 to 1 or 5 to 1?