Friday, March 14, 2014

MTU Weekend Ed. - Getting there [T-(n-1) weeks]

Stocks sold off meaningfully this past week amidst building uncertainty regarding Russia, among other things.

Stocks either have topped or are retracing prior to a final upswing.

A top here would fit our speculated March/April window which is the end of March +/- 1 month (Chart 1).  In that case, the sell-off is likely approaching the end of wave one down (Chart 2, red). 

However, odds appear to favor one more upswing.  In that case, new highs are expected to produce a unambiguous overthrow, particularly in the Dow.  A deep rebound but no new highs would be interpreted as a failed terminal wave.  Consider the following.

[1] The Dow failed to push above its 2013 high, while other benchmark indexes have been in their all-time-high territories for weeks.  The possibility of the Dow catching up should not be dismissed prematurely.

[2] The proposed "timed top" in Chart 1 is still two weeks ahead.  The possibility of new highs in a few weeks should not be dismissed prematurely.

[3] The current sell-off allows SP500 to retest is 50-day moving average which is around 1830. The MA50 offers potential support.

[4] Price patterns during the sell-off can offer support. While bearish interpretations of the sell-off are very much valid, particularly a five-wave decline off the orthodox high (Chart 2, red), the possibility that this past week's sell-off could be an ending wave rather than the initial leg down should not be dismissed prematurely. For example,

(1) The green count in Chart 2 shows a complex ABC correction in SP500 since its mid-February high. Wave A is a zigzag. Wave B is an upward flat. Wave C is a strongly declining ending wave.

(2) From SP500's all-time high in March, the subsequent decline can also be counted as a potential flat (Chart 3, green).

(3) Chart 4 shows a potential bullish expanding triangle in NDX since its mid-February high.

For the very near term, price actions outside large-caps, as well as some technical indicators, have produced some bullish divergence. Note that the mid-cap SP400 index and the small-cap Russell 2000 index did not suffer a lower low on Friday.  In fact, both indexes were up on Friday.