Saturday, October 18, 2014

MTU Weekend Ed. - Technical Damage (10/17/14 close)

The 2nd turn window (see At the 2nd Turn Window (10/10/14)) saw SP500 diving nearly 10% from its all-time high (Chart 1). The sell-off drove SP500 below its 200-day moving average and put the key post-2009 rally trend-line at risk (Chart 2, green line).

However, the decline in SP500 appears to be three waves so far, offering no satisfaction to those seeking confirmation of a trend change or better timing for a buying opportunity (Chart 3). 

Moreover,  several benchmark indexes such as the Midcap and Russell2000 saw their nominal highs a few weeks earlier than the rest of the pack, adding an extra two waves.

Adding to the complexity, the three day rebound this past week has brought Rusell2000 above, the Transports within 4 index points of, and the Midcaps quite close to their respective Oct 2nd lows, while the rest of the pack lagged. Since the Oct 2nd low is potentially the first wave down for SP500 and others, an overlap between the first and the fourth wave diminishes the prospects of a regular five-wave decline.

If the trend has changed, one has to look elsewhere such as a leading diagonal triangle or a series of wave ones and twos.  It should be noted that the magnitude of the pullback so far has already put the September high on par with major highs since 2009 (see Chart 2). So the status of the September high should not be diminished.

On balance, the pullback appears corrective based on the price structure to date. Under this scenario, while the pullback has potential to extend in time and in price, it is likely to be fully retraced.

*** near term scenarios
The price structure also suggest the following near term scenarios, as outlined in Chart 3.

[blue C] One more drop ahead of a more major low, netting a 7-wave drop in all indexes from early September.  This scenario can be further illustrated by the price structure of the Cumulative Advance and Decline line associated with the SP500 index (Chart 4).   A negative divergence between SP500 and its AD line at the September top hinted at the subsequent sell-off into October.  The SP00AD line is in its wave #6 rebound.  Perhaps a final wave #7 retest of the lows would result in a more solid low.

[green C] A low is already in place (at least for the the initial decline).  A deeper retrace of the current sell-off  or an entire retrace to new highs is likely in progress.

*** long term scenarios
In terms of the big picture since the 2009 bottom, the above observations also suggest that the current decline is a fourth wave based on the bullish count (Chart 5, blue or red)  or the bearish initial decline which fully or partially corrects the entire hope rally since 2009 (Chart 5, black).