Saturday, June 21, 2014

MTU Weekend Ed. - Tireless bull, Exhaustion, or Expanded Consolidation (6/20/14)

Tireless bull
New record highs in stocks this past week dismissed the early June high as a top of any significance. At the moment, the Russell 2000 index is the only lagger at 2.05% below its March high while other indexes made marginal record highs. This could suggest additional upward subdivision with minor pullbacks for the current upswing.

The bullish run appears to be tireless, particularly with realized vol dropping to around 5% per annum and implied vol to around 10%. 

Curiously, the proposed ending diagonal triangle in SP500 remains intact from a price perspective despite higher highs (Chart 1).  Currently, SP500 stands below the maximum level associated with the EDT.  In addition, technical signs of overbought conditions are present.

It should be noted that the wave count associated with (c) of [e] in Chart 1 appears forced, but is not impossible. The complex double three count on the rally since 2009 may be a better fit (Chart 2). This past week's upswing represents a proper overthrow in this case.

Each count (Chart 1 or Chart 2) suggests exhaustion, and te market could turn at any time. A breach of the recent low around 1925 in SP500 would be an indication of a potential turn.

Expanded Consolidation
The above perspectives lead to another interesting possibility that represents a bull and bear trap. What if the market topped at the end of 2013 and the 2014 gyrations are part of an expanded consolidation that is still missing a final (major) pullback?

We illustrate the proposed scenario with SP500 and the Russell 2000 index (Chart 3). Under this scenario, the Q2 upswing in stocks is wave B-up of this consolidation. Wave C-down is straight ahead. If the bullish sentiment prevails, a lengthy sideways move (triangle or diamond) is likely (for most if not all of 2014). Otherwise, wave C-down is likely to break the February low (1739.66 in SP500).

Chart 4 shows how this expanded consolidation can fit into the larger count as a wave (4)-down.