Friday, August 24, 2012

MTU Weekend Ed. - Reaction (8/24/12 Close)

SP500 made a marginal new Hope Rally high on Tuesday. The new high was not only unconfirmed by other indexes (with the exception of Nasdaq 100), but also quickly reversed. SP500 lost its gains since Aug 9 at Friday’s low, before staging a 15-point rebound.

From a big picture perspective, it is likely that the U.S. stock market is making a typical reaction after SP500 had registered a fresh Hope Rally high but had been accompanied by mediocre technicals. On a monthly scale, SP500 is still consolidating above its decade-long support/resistance zone (Chart 1).

We observed in New 2012 High (8/17/12), “Will there be non-confirmation among indexes? It’s certainly probable given the associated lackluster volume and market internals, until technical profiles turn more favorable.” The current reaction would give time for other indexes to “catch up”.

For the near term, we look for clues about how this reaction can take shape based on EWP (Chart 2).
[green, most bullish] An ABC correction ended at Friday’s low.
[blue, bearish] We have a three-wave rebound following a three-wave decline so far. The most likely structure would be a sideways triangle or a forceful flat decline. Friday’s low holds if it is a triangle and fails (meaningfully) if it is a flat.
[red, most bearish] A meaningful trend change begins with a leading diagonal triangle. Last week saw wave [a]-down and [b]-up. Look for wave [c]-down to commence once [b]-up ends.

Chart 3 shows how these near term counts can fit into the larger count. And Chart 4 updates the advance/decline profile of SP500.