Saturday, April 18, 2015

MTU Weekend Ed. - Breakout Failure, minor or major? (4/17/15 close)

Stocks succumbed to resistance (See Overhead Resistance (4/10/15)) this past week and pulled back sharply on Friday. SP500 reached a high of 2111.91 on Wednesday but failed to break above its March high, nor its February all-time high. Friday’s low of 2072.37 registered a 1.87% drop from Wednesday’s high. The sell-off has pushed SP500 firmly back into its multi-month consolidation range (Chart 1).

Interestingly, SP400, Russell2000 and Wilshire5000 indexes did achieve fresh all-time highs this past Wednesday. Hence, it’s reasonable to consider Wednesday’s high as either

[bearish] the orthodox high in SP500 if a larger degree down swing has started (Chart 1, red terminal triangle) , OR

[bullish] as the start of a terminal decline in a corrective pullback (e.g. wave C of a downward flat or wave E of a triangle, see Chart 1- blue).

Odds appear to favor the bullish scenario. Consider the following.

Friday’s sell-off represents a downward test of the 50-day moving average of SP500 for the fourth time since its February all-time high, similar to the price actions during the consolidation from November 2014 and February 2015. See the gray circles in Chart 1.

Friday’s emotional and event-driven sell-off is consistent with the personality of wave E of a triangle. Chart 1 also shows how such a triangle fits into the wave structure at one larger degree as

[blue] b-down of (c)-up of [e]-up . Wave c-up of (c)-up is next.

[green] [c]-down of 2-down where wave 2-down is a  [a]-[b]-triangle [c] structure that stock indexes often deliver following the 2009 bottom.

If our assessment of Wednesday’s high is correct, our gap analysis suggest that Friday’s open gap is likely to be filled in the foreseeable future. See past weekly commentaries for details.

Chart 2 presents the corresponding larger degree tracking counts since the 2009 bottom.

We do note that he bearish scenario with a terminal triangle is quite valid and that stocks are in the time window for a top. See Chart 2 and Overhead Resistance (4/10/15).  A failure of the potential triangle in the bullish scenario above is generally bearish with gaps around 2022 and 1905 becoming vulnerable.  In the very bearish case, perhapsSP500 will continue to track the symmetric price sequence highlighted in Chart 3, where this past week's market top is point 11 in the sequence.


It'll be interesting to see how price actions in the coming weeks, now that the OPEX week is over.