Friday, July 1, 2011

MTU Weekend Ed. - A Fresh Shot (7/1/11)

A fresh shot at the long-term resistance zone
The 5+% surge off the 200-day moving average this week represents the third recent attempt to break above a decade long support/resistance zone for the broader market. At the moment, the SP500 index managed to close above its zone this week (Chart 1). The Wilshire 5000 is not far behind (Chart 2) . Odds favor a eventual success as a meaningful number of indexes and sectors have already exceeded their 2007 highs, potential near term volatility notwithstanding. Please see Chart 1 in The Big Picture (U.S. Stocks), June 2011 Update (6/25/11) .

Size matters
The lengthiness of the 2011 correction (which has lasted 5 months so far) makes it less likely to be part of the advance since July 2010. If so, the implication is meaningful upside ahead for the market - once the correction is over. From an Elliott wave perspective, the June low has the potential to be the end of an intermediate degree wave (4) or wave (X) correction (Chart 3, green and red labels). Please also refer to Tracking Scenarios (6/10/11) regarding thoughts on the larger count.

Downside potential from current levels
What's the potential for a pullback or even a reversal from current levels? This section summarizes the top scenarios and subjective probabilities.

As indicated in Chart 1 and Chart 2 above, both $SPX and $WLSH are currently back-testing a key trend line (dating back to the 2009 low) from below. That trend line could present near term resistance.

[1 - similar probability] Should the QE fractal continue to track, we could see a swift decline from current levels (Chart 4). In other words, the market is approaching the end of point 6 and a decline to point 7 should retest the recent low.

[2 - similar probability] Squiggle count suggests a potential small-degree wave (iii) top, we could see a moderate wave (iv) decline (Chart 5 and Chart 6).

[3 - lower probability] A major high is in place with the current advance as wave 2 or B, we could see a wave 3 or C decline to new lows.