Saturday, April 20, 2013

MTU Weekend Ed. - Bull Fake-Out (4/19/13)

In SP500 Breaks Out (4/12/13), we observed that the quality of the breakout to new all time highs in SP500 was unimpressive as (1) the bullish push by short covering from the initial batch of tight stops was weak and (2) volume offered little confirmation. We concluded that new inflows and running wider stops are required to push the index higher.

Soon enough, SP500 tumbled 3.84% from its all time high to Thursday’s low of 1536.03, before finding support at its 50-day moving average (Chart 1). The sell-off leaves us with the following top three tracking counts:

[1] The top is in and the Hope Rally is over (Chart 1 red, Chart 2 red-alt & black to (C)), since all necessary waves (to as small as hourly bars) to count the Hope Rally as a double three are present.

[2] A major top is in. A larger correction to just below the 200-day moving average (say the 1425-1450 area in SP500) is probable before another ABC attempt to breakout. The proposed correction counts as

(a) a larger wave (X) in a triple-three with respect to the 2009 low or
(b) a wave (D) in an EDT with respect to the 2009 low (Chart 2 black) or
(c) a smaller wave (X) in a triple three with respect to the 2011 low (Chart 1)

[3] A minor pullback is over (or nearly over), with an immediate advance to complete a double-three or extended-five with respect to the November 2011 low (Chart 1 red-alt). This bullish scenario is on the table because the sell-off to date can be counted as a double three or an EDT (Chart 3 and Chart 4). Additional price action will help clarify the likelihood of this scenario.