Saturday, January 26, 2013

MTU Weekend Ed. - Triple Top (1/25/13)

Near Term Update -
SP500 has continued its crawl along the upper edge of the base channel (Chart 1), up 1.14% over the past week and closed above 1500.  Price patterns discussed in Downside Risks Increasing (1/18/13) continue to track well. To recap, top candidates for the pending high are

[blue] Wave 3 or wave [i] of 3 of the upswing from point 6 to point 7 of our Hope Rally model. A wave 4 or wave [ii] of 3 retrace is in order, before further advances toward the end of the Hope Rally are seen.

[red] Wave (Y) off the November low if the proposed final upswing of the Hope Rally is a three wave structure. Hope Rally ends.

[black] Wave B-up of a flat-like structure dating back to the September high. Wave C-down is next to complete point 6 of our Hope Rally model.

Please see Downside Risks Increasing (1/18/13) for details.

With this past week’s subdivision higher, the market is indeed another step closer to the next downswing. The squiggle counts in Chart 2 suggest that the relatively “weaker” advance since the Jan 8th low is either concluding (green primary) or anticipating the final down-up subdivision (green-alt, blue). Note that both of these near term scenarios suggest limited net upside potential from current levels, as far as the upswing since the Jan 8th low is concerned.

There’s a cluster of support around 1435-1440 area in SP500. Based on our wave counts, this potential support is best interpreted as the target area for either the initial sell-off of the next major downswing or wave [ii]-down of bullish wave 3-up.

The Hope Rally -
At this stage, the proposed Hope Rally presents some interesting features regarding its price patterns and wave structures. See Chart 3 which focuses on the Dow.

Our primary bearish count interprets the rebound from the 2009 low to date as wave b-up of a multi-year bear market which started at the Y2K top (Chart 3, red). This wave b-up is dubbed “the Hope Rally.” Wave c-down is likely to follow after a triple-top.

There exists a number of functional corrective wave counts for the Hope Rally (Chart 3, black, pink, red). At current market levels, the geometry of the black count (which may not be the most ideal count) is quite interesting:

[1] simple and intuitive with [A] being a simple zigzag, [B] a flat, [C] a giant ending diagonal triangle.
[2] equal size with [C] = 1.005 [A] in index points and [C] about 2/3 x [A] in percentage points (returns) as of Friday’s high.
[3] multiple duration with [C] about 3 times [A] in time.

Our alternative bullish count would label the entire Hope Rally as a stack of first and second waves or a leading-diagonal-like first wave which is now approaching its end.  The first count of a series of 1s and 2s does not have the "right look" at the moment and the second count of a leading diagonal structure suggests a deep wave-two pullback which would be in sync with the bearish count on an intermediate term horizon.