Friday, May 16, 2014

MTU Weekend Ed. - Selling Opportunity or Bear Trap (5/16/14)

The marginal higher (all-time) high of 1902.17 in SP500 this past week proved to be a false breakout. Since then, SP500 saw a swift 2.09% sell-off to Thursday's low of 1862.36, before rebounding to close a Friday's high of 1878.28.

Price actions now present two key scenarios:

[bullish and a bear trap] Stocks are wrapping up an expanded flat pullback (Chart 1 green) , before advancing to new highs to deliver a proper overthrow in the proposed ending diagonal triangle (Chart 2 green).

[bearish, topped] Stocks have topped, for now, following a weak post triangle thrust to a marginal new high (Chart 1 red). While the marginal new high meets the minimum requirement of the proposed ending diagonal triangle, stocks have failed to deliver a proper overthrow (Chart 2). Under this interpretation, Friday's rebound counts as a small-degree wave two and a selling opportunity with proper position size and a hard stop at the May 13th high of 1902.17.

Odds appears to tilt moderately towards the bullish scenario. Among other things, price actions in the Russell 2000 index leaves meaningful near term upside potential.

In terms of price action, the Russell 2000 index has been the weakest since its March high and also made a lower low this past week (Chart 3). The lower low this past week appears to wrap up a diagonal triangle, a leading one under the bearish interpretation and an ending one under the bullish interpretation (Chart 3 green, Chart 4). However, these scenarios points to a potentially meaningful rebound or a new high in the Russell 2000. If so, the senior indexes are likely to have time for another new high.

The bullish interpretation is not without risks, as evidenced by the nested 1s and 2s count in the Russell 2000 (Chart 3 red), which projects an immediate [iii] of 3-style sell-off.