Friday, March 25, 2011

MTU Weekend Ed. - The Larger Count (stocks and USD) (3/25/11)

The key assessments in Path of least resistance/support (3/18/11) remain applicable (see the overview section), with the exception of fresh support levels brought about by a 2.7% follow-through rebound in SPX over the past week and a 5.61% recovery from its 1249.05 low.

This piece updates support levels and near term wave counts, offers thoughts on the larger count and how recent market gyrations fit in, and highlights a potentially important development in the USD index.

Support levels
The stock market recovery from its recent lows has been repairing technical damages brought by the recent sell-off and building fresh support levels. At the moment, the immediate support zone in SPX is 1295-1305 which includes a break-out pivot, 50-day simple and exponential moving averages and a prior dynamic resistance now serving as a support. Lower support levels are around 1280, 1226 and 1194.

Near term wave counts
It remains to be seen whether the market can deliver a new high without breaking the recent low first. While the recovery has been impressive, it is carried out with low and declining volume and less impressive breadth (Chart 1).

The primary bullish count is that the low of the correction was in at 1249.05 in SPX. The next leg of advance to new highs is already in progress. Please see the associated squiggle count on futures in the appendix.

The primary bearish count is that the rebound is wave [x]-up of a larger correction. Once wave [x]-up is complete (with Friday's high as a potential candidate), wave [y]-down will either bring the market to new lows or consume time to expand the correction sideways. Please see the associated squiggle count on futures in the appendix.

A super bearish variant of the base case bearish count is that the market has finished or is about to finish a wave [ii] retrace in the form of an upward expanded flat or a running flat across indexes, as Chart 2 on RUT illustrates.

The larger count
Chart 3 updates the various tracking counts on the hope rally since the 2009 bottom. The immediately bullish green count and the immediately bearish red count are the preferred tracking scenarios at the moment, given the market development.

Note that the key element differentiating the green and the red counts is really whether the most recent wave (X) ended in June or in August of 2010. Please see a detailed discussion regarding this issue in Counting the QE2 Rally section of Bull market, B-wave and Beyond (2/18/11).

The USD index
The whither the dollar section of Bull market, B-wave and Beyond (2/18/11) stated that "the primary count on the dollar is bearish for the intermediate term." The USD index has declined 3.11% since then to its recent low, but rebounded smartly this week as sentiment had reached very low levels.

The recent rebound is a potentially important development in the USD index as the recent low could be a candidate for a pivotal turn. The rebound may mark
(1) the end of a contracting diagonal triangle for the near term (Chart 4).
For the longer term, the rebound may mark
(2) the end of a wave (2) pullback for (Chart 5, green), or
(3) the end of wave (b) of an upward expanded flat wave [2] (Chart 5, red), or
(4) the end of wave [D] of a bearish contracting triangle (Chart 5, purple).

The alternative near term count (Chart 4, red) allows for one more A-B-C probe to lower lows to complete the wedge in the USD index. But the message regarding the larger picture remains the same.


Appendix - Futures



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