Thursday, June 16, 2011

Market Structure & IPM - Part 2

After going over the Inflection Point Model, I decided to analyze the Market's Structure to determine possible market patterns which could result in a Stock Market Bottom next week. Since market structure is a primary determinant of trend changes, I will solely try to analyze the structure of SP500 in this post.

Looking at the weekly chart, it seems very clear that the rally from the March 2009 low has been impulsive. This means that individual rally segments have had 5 waves. Therefore, we are missing the final rally leg to complete the broader 5 wave sequence.

After looking at the above chart, it seems clear that we have strong trend line support near 1220 (SP500). Furthermore, in order for the above mentioned (4th Wave) scenario to play out, the market should bottom above 1222 (SP500).

The second most important aspect of the current correction is that it is tracing out a classic corrective pattern. This pattern is called 3-3-5, with the final wave having 5 sub-divisions.

However, right now we only have 3-3-3 structure. Therefore, in order for the market to complete the corrective pattern, it should hold up for 1 more day and then decline to a new low below the March 2011 low at 1248 (SP500). Since this is the most appropriate market structure meeting the upcoming market turn date (according to the last post), I am delineating it over here.

Note: Triangle pattern will take longer to complete. Therefore, it is a lower probability at this juncture.

Market should bottom between 1250 and 1222. In any case, I will wait for the trading alogorithm to generate a buy signal before going long.

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