MTU Weekend Ed. - Were it not for financials ... (1/21/11 Close)

Stocks - topped or a fourth wave in progress

Stocks are potentially at a decision point between (1) an "immediate" end to the hope rally and (2) some meaningful delay of a "top" (say about 6 months) and possibly some meaningful upside potential.

Regarding the wave structure of the broad stock market, top choices are that
[1] The advance since the July low ended at the recent high earlier this week, meeting the expectation outlined in Hope Rally Ends Here (Jan 2011 attempt) (1/14/11).

If so, the wave structure of NDX suggests that the top is likely the end of the entire hope rally from the 2008/2009 lows. Completing the advance since the July low (Chart 1, red count) also completes a larger zigzag since the late 2008 low as well (Chart 2, red count). In addition, the long term count on NDX in Chart 2 shows that NDX has satisfied the minimum requirement of a top from a 10-year perspective by having achieved a recovery high.

The risk to this interpretation is threefold. First, wave [Y] of b has failed to reach equality with wave [W] of b (Chart 2). Second, the entire advance since the Jul'10 low could extend making the current top wave 1 of (C) of [Y]. Third, the current decline is a small degree 4th wave (see item [2] below).

Under this scenario, INDU has diverged from the rest of the pack. It potentially is in the final stretch of a rare expanding diagonal and should top soon (Chart 3 and Chart 4, blue count) .


[2] The pullback this week is a fourth wave - i.e. wave [iv] of 5 in SPX and INDU, but wave (iv) of [iii] of 3 in NDX (blue count in Chart 1, green counts in Chart 4 and Chart 5).

Here is a logical speculation under this scenario.

It is likely that minute wave [v] of minor wave 5 in SPX and INDU itself extends, offering room for NDX not only to finish [iii] of 3 but also [v] of 3 (Chart 1 and Chart 2, blue count).

In other words, some meaningful upside potential exists before minor wave 5 in SPX/INDU and minor wave 3 in NDX top together.

That top in SPX/INDU likely corresponds to wave A of the PINK count in Chart 2 of Hope Rally Ends Here (Jan 2011 attempt) (1/14/11). The subsequent pullback will likely be wave 4 in NDX and wave B in SPX/INDU, to be followed by a final advance as wave 5 in NDX and wave C in SPX/INDU.


Were it not for financials ...
Financials could play a key role in shaping the trajectory of the broader market. The numbers speak for themselves (Chart 6 and Chart 7). The risk of meaningfully validating the weakness implied by the sector's "severe" under-performance contrasts with the sector's potential to catch up with the rest of the market.

Standard & Poor's reports that financials, as the second largest sector, accounted for 16.24% of the SP500 index as of 1/21/2011.

Staples (10.43%), Tech (18.78%) and Discretionaries (10.50%) are either at all-time highs or practically there. These sectors represent 39.71% of the SP500 index.

Materials (3.57%), Energy (12.27%) , Industrials (11.07%), Health Care (10.91%) have retraced more than 2/3 of the 2007-2009 sell-off. These sectors represent 37.82% of the SP500 index.

The utilities sector (3.57%) has recovered half its loss.

Financials (16.24%) have lagged severely in both relative and absolute terms, regaining "only" about 40% of their prior loss. Were it not for financials, the SP500 index would be meaningfully higher and meaningfully closer to the prior peak.

Market Timing Update (1/21/11)

[EOD] ES squiggles










[10am] Squiggle update -
New high in INDU, likely wave (b) of [iv] or part of wave [v]-up, as outlined in yesterday's update.
The following chart updates the squiggle count on ES outlined in yesterday's update.

Market Timing Update (1/20/11)

[ES squiggles]










[EOD] Key observations:
[1] Squiggles from the recent high counts well as a five-down with an extended fifth wave, with the exception of the structure in INDU. The implications are informative:

(a) The advance since the early December 2010 pivot low (which is [ii] of 5) ended at the recent high (which is [iii] of 5).

The current decline is (a) of [iv] with additional downside potential which should be floored by the early December 2010 high.

The rebound from today's low has met its minimum requirement but is likely not complete given an extended fifth wave.

(b) The advance since the December 2010 pivot low (which is 4 and thus since the July low) ended at the recent high (which is 5).

[2] The wave structure of the decline in INDU counts well as a triple zigzag under the bullish interpretation or a leading diagonal under the bearish interpretation (Chart 1).

An update on the larger count - topped or a fourth wave in progress
Charts 2 to 4 update the larger count in SPX, INDU and NDX.

Of particular note is the NDX counts. Given the relative size of the waves, the current top can "only" be the end of minor wave 5 which is bearish OR the end of (a weak) wave (iii) of 3 which is bullish.

As a follow up to yesterday's discussion, in addition to an initial five-down in the NDX squiggles, the size of the decline is now too large to emphasize the 2268.30 level. The recent high is a top of some sort at a larger degree as indicated in today's chart.

[Overnight update]

Market Timing Update (1/19/11)

[EOD]
NDX:watch the 2268.30 level
Initial confirmation of a meaningful top in NDX (either minor wave 3 (more likley) or minor wave 5) is likely at the BOY high of 2268.30 as indicated in Chart 1. Note that 2268.30 is 2.72% below the recent high and 1.52% below today's close.

Today's better-than-1% decline leaves us with two competing tracking counts.

The red count calls for a top being in place. If so, other indexes probably have topped as well - either as the top or a meaningful interim top. See Hope Rally Ends Here (Jan 2011 attempt) (1/14/11) for additional discussions.

The green count sees an expanded flat for [4] of iii and thus sees today's decline as wave iv of (v) of [v]. There are a number of things going for this count.
a- Wave [4] of iii alternates with wave [2] of iii.
b- Wave iii channels well as indicated by the green channel lines.
c- The decline from the recent high counts as a (potentially incomplete) zigzag so far (Chart 2), possibly wave [A] of a triangle iv or the entire wave iv.
d- Today's low came at the lower boundary of the wave (v) trend channel as indicated by the blue trend line.

A decline below 2268.30, the top of wave i of (v), will reject the green count and confirm a meaningful top. The same can be said about COMPQ.
SPX:
Chart 3 presents the two tracking counts on SPX.
The blue count sees a top. Or is wave [v] extending based on the gray count? Breaching the BOY high as well as the blue [iv] low is important to eliminating this bullish potential.

The green count sees today's decline as wave [iv] of 5. Note that today's low also rests on the lower boundary of the trend channel for minor wave 5 if the green count is playing out.

INDU:
Here's an update on the wave structure of INDU with three tracking counts discussed in recent days.

The blue and red counts see the top being in place. The green count warns of an incomplete ED in the Dow (Chart 4 and Chart 5). If the incomplete ED played out, it would meaningfully tilt the odds towards the bullish counts discussed above.

Moreover, the squiggle count (right Chart 6) shows a distinctively corrective decline (so far) in the Dow.

RUT:
These counts (Chart 7) on the RUT are inspired by Matt's comment in the comment section. The red count sees a top in place. The green count has wave (iv) being an expanded flat (or a triangle?), which would alternate with the zigzag wave (ii). Today's low comes close to the mid-channel line based on the green count.










****
[Overnight update]
Squiggle counts discussed yesterday are still tracking, with an ED possible on senior indexes.

Market Timing Update (1/18/11)

[EOD] Additional upside potential exists at "tiny" degrees. The rally into the close is likely the end of a small degree 3rd wave. ED for (v) of [v] of 5 (or v of (v) of [iii]?) in SPX and INDU is a possibility. Futures (especially NQ)advance on Apple earnings in AH.



[720am] Overnight update -
In ES, the revised black count is low aligned with the green count outlined yesterday. The main difference between these two counts is where [iv] of 5 is labeled.
In YM, the proposed rare expanding diagonal discussed in yesterday's update is tracking.

Market Timing Update (1/17/11)

[12pm] Count update -
The decline in the futures this morning has the potential to be yet another small degree fourth wave or the start of a meaningful decline as outlined in Hope Rally Ends Here (Jan 2011 attempt) (1/14/10). The following charts updates the squiggle counts on the March futures (ES, YM, NQ). The decline in NQ has been particularly impulsive so far but that in ES and YM still lacks a 3 or 3-type drop.


Making sense of the INDU squiggles -
The recent overlap in the squiggles of INDU has introduced substantial uncertainty regarding the near term count as well as the larger count, as similar overlap has not been observed in other broad indexes. Here are some observations.

[1] If the larger count of INDU in the 60-min chart below is correct, since [iii] of 5 is shorter than [i] of 5, the maximum upside potential in INDU is 11988.92. Given this cap, it seems that a nested 1s2s structure for wave [v] of 5 is less likely.

[2] Wave [v] of 5 may have ended based on the blue count. But the squiggle count is not ideal.

[3] Wave [v] of 5 may be tracing out a rare expanding diagonal based on the red count. If so, the decline in the futures should be wave b-down of (e).

MTU Weekend Ed. - Hope Rally Ends Here (Jan 2011 attempt) (1/14/11 Close)

You are here (SP500)
Hope Rally Update (12/3/2010) observes that the U.S. stock market has experienced three policy-induced hope rallies since late 2008/early 2009. Hope Rally Ends Here (Dec 2010 attempt) (12/15/2010) alerts a potential top according to one of the tracking counts, which turns out to be premature. In hindsight, that particular top in broad market indexes is only minute wave [i] of minor wave 5 since the July 2010 low. In other words, minor wave 5 has since extended. As the market goes into 2011, Hope Rally Update 2 (12/31/2010) outlines four major scenarios regarding the potential trajectory of the hope rally going forward (Chart 1).

Currently, the market is approaching another logical point for a potential top as the proposed minor wave 5 has nearly exhausted its subdivisions (Chart 2) - baring a less likely extension of minor wave 3. Thus, a retrace of the advance since the July 2010 low is likely. Moreover, two of the major scenarios in Chart 1 suggest a meaningful top with downside potential exceeding 20%. The gray count calls for the end of a large zigzag while the blue count calls for the end of a motive five-wave advance since the March 2009 low. And the pink count sees only a partial retrace of the recent advance, but a correction nevertheless. The "15" handle on the VIX is certainly not encouraging (Chart 3 to the right). The personality of the anticipated pullback will inform us which of the four counts is tracking the best.



Dow Jones World Stock Index ($DJW)
The wave structure of the DJ World Stock Index ($DJW) is also informative since (1) it has arrived at a very similar point and (2) its broad global coverage of approximately 95% of the market capitalization of 50 countries adds credibility. See Chart 4.

The subdivisions of minor wave 5 since its July low is still open for debate and is subject to the risk of being meaningfully incomplete. However, minor wave 3 is 1.61 times minor wave 1 and the index is at a level where minor wave 5 reaches equality with minor wave 1. These textbook style characteristics deserve attention.

Nasdaq 100 Index ($NDX)
NDX is tracing out a different wave structure at a larger degree since its Y2K peak (Chart 5). However, as Chart 6 shows, NDX is either at wave 3 or 5 of (C) based on the red count or is very close to that point based on the green count.


Bonds
Here are a couple of scenarios how bonds could rally on a pullback in stocks, at least initially (Chart 7 and Chart 8, 30Y UST prices) .

The relatively moderate rally in bonds based on the blue count as wave [iv]-up probably corresponds to a moderate correction in stocks (e.g. the pink count in Chart 1).

The relatively aggressive rally in bonds based on the green count as wave 2-up probably corresponds to a deep correction in stocks (e.g. the blue or gray counts in Chart 1).