Sunday, April 7, 2013

Market Timing Update - A Top (4/5/13 close)


Bottom line - The five wave upswing from the November 2012 low likely topped this past week (or very nearly so - see discussions on SP500 below.) The current top has the potential to mark the end of the hope rally as discussed in A View from a Top (3/15/13) and Monthly Outlook Update (3/28/13).  Since confirmation of the top would likely be too distant to be helpful, we closely track two bullish counts at larger degrees that allow for one more advance once the correction is over.  Nevertheless, the decline from the early April high is likely not over.

Details -
The SP400 mid-cap index, which has been notably strong, has now delivered a well-formed five-wave decline from its April high.  This past week's sell-off not only breached wave (i)-up off the February low (Chart 1), but also bucks the uptrend of a five-wave advance since the November 2012 low (Chart 2).  This price dynamic strongly suggests that it is likely only the initial leg of a sell-off. 



While a five-wave decline is likely present in the SP500 index (Chart 3, blue), the sell-off did not breach its wave (i)-up off the February low, nor its nominal high in February (Chart 4). Should SP500 diverge from SP400 in the near term, the red and green counts in Chart 4 would track.  In light of price actions in SP400,  these near term bullish counts should be of lower likelihood.



What's important is that this top has the potential to mark the end of rallies at several degrees, including the hope rally itself.  For example, the red count in Chart 2 completes the rally from the 2011 major low in the form of a corrective zigzag-flat-flat structure.  Since the 2009-2011 rally counts reasonably well as a corrective zigzag, the entire hope rally could be done.

Since confirmation of the top would likely be too distant to be helpful, we closely track two bullish counts at larger degrees that allow for one more advance once the correction is over. The first scenario is presented by the blue count in Chart 2.  The labeled count maps well into SP500.   The second scenario is the EDT discussed in recent weekly commentaries (Chart 5).  Even under these bullish counts, the decline from the early April high is likely not over.  Near term weakness would offer an opportunity for stocks to retest their breakout levels as marked by horizontal support lines in Chart 2, Chart 6 and Chart 7.




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