Saturday, June 27, 2015

MTU Weekend Ed. - Risk Premium (6/26/15 Close)

U.S. stocks pulled back steadily this past week, driving SP500 below its 50-day moving average.

A potential five-wave decline from the rebound high of 2129.87 in SP500 to Friday's low of 2095.38 (Chart 1, red) points to lower prices ahead.  Current event risks  (e.g. Greece, China) and valuations are sympathetic with the price turn.

However, the pullback in SP500 so far is likely an elongated flat based on price actions in SP500 in conjunction with other benchmark indexes (Chart 1, blue) - note the asynchronous highs and lows among indexes in Chart 1.  Wave C of this potential flat is 3 times wave A in size. If this is the case, the current pullback is wave (b)-down of [e]-up in our base case scenario (See New All Time High (6/19/15), A Decision Point (6/12/15)).

* In light of the gap down in futures on 6/28/15 over Greece, if futures does not sufficiently recover overnight,  our base case scenario should be tweaked to reflect the possibility that the current pullback serves to complete wave [d]-down.  See Chart 2.  

Meanwhile, VIX could be completing a bullish triangle if the mid-June high is not challenged.  See Chart 3.  Let's see if the priced-in risk premium pays off soon or is only an initial deposit.