Sunday, July 24, 2011

MTU Weekend Ed. - Breaking Out ? (7/22/11 Close)

Near term upward breakout likely
Odds favor a near term break out to the upside in stocks, given wave structures domestic and international benchmark indexes. Note that

Nasdaq100 index and DJ utility average delivered new recovery highs this past week. At this past week’s high, SP100 and INDU are just 0.23 and 2.46 index points shy of their respective July highs. The Nasdaq Composite Index is now 16.22 index points (0.57%) shy of its July high.

SPX once again closed above its decade long resistance zone (Chart 1), readying for the Terminal Wave (7/8/11).

Key international stock indexes, particularly European ones, are showing signs of an upward reversal. In fact, using Dow Jones World Stock Index and Global Dow Index as proxies, one suspects that this proposed terminal move is an extended one (Chart 2 and Chart 3).

Two key questions remain
Should the market breaks out upwards, it likely confirms the end to a multi-month consolidation dated back to the February 2011 high and proves to be range busting (see Range Busting to be (7/15/11)).

Did the correction ended in mid-June in the form of a flat or in mid-July in the form of a triangle? Odds appears to favor a flat over a triangle, consistent with the wave structure in COMPQ and NDX. Chart 4 offers a local count under this interpretation.

What’s the larger count? Terminal wave (7/8/11) highlights a number of long term wave counts, none of which has been rejected, only the associated odds having fluctuated.

Downside risks
[1] A simple zigzag hope rally approaching its end (b wave)
Of particular note is NDX, whose current high of 2432.84 comes very close to a long term equality level of 2462.84 (Chart 5) and whose near term wave structure has satisfied the minimum requirement of a top (Chart 6).

A reversal around currently levels (likely after another push higher) in the broader market makes the structure of the hope rally a simple zigzag (Chart 7) and the terminal wave in SPX an expanding ending diagonal. Both of these structures have aesthetic appeal, particularly from a wave personality perspective (Chart 4, red labels). Note that (5)=(1) at 1376.4 and (5)=1.618(1) at 1449.53 in SPX.

[2] Correction continues It’s probable that the 5-month correction is only to extend with the current advance being just an (X) wave. Once over, a sizable (Y) wave decline should complete the [X] wave correction of a large double zigzag hope rally (Chart 8).