Thursday, June 2, 2011

Stock Inflection Analysis

After today's drastic sell-off, after reading a lot about the impending correction in June, after listening to Dr. Doom, Nouriel Rubini's prediction of lower prices and after perusing through various blogs, I went back to basics to analyze the stock market's behavior in terms of my proprietary models.

According to the Inflection Point Model, it seems like there were two potential turning points in May 2011. First in mid May and second on May 25, 2011. The second inflection point was a relatively weaker turning point, in comparison to the mid May turning point. Furthermore, these turning points were not confirmed by Model 2. This non-confirmation can sometime mean that the suggested turning point is not strong enough.

In order to further analyze the weaker turning point (lower amplitude of the turn power), I went back to identify locations when the market bottomed or topped at the weaker turn point. After analysis, it seems like November 2010 bottom also coincided with a weaker turn point, and this bottom resulted in a 10% + stock market rally.
Therefore, it is possible that the market might have bottomed on May 25, 2011. However, if the market declines below the May 25, 2011 low then it would mean that the market did not bottom, and will continue to go down for the next two weeks. This is the time when we have the next turn date coming up.

June 1, 2011 Sentiment and EW:

If the above analysis is true, it would suggest that current decline was wave 2. Wave 2 normally brings about a lot of pessimism. This was particularly true for today's stock market action.

In this chart it is clearly evident that the fear did spike today. Since previous corrections have ended with a spike in fear, it would be very interesting to keep a close eye on the stock market performance over the next few days.

Finally, there are several non-conformances which might prove to be bullish. For example:

1-  Copper is well above its May low
2-  DJIA made a lower low today, where as SP500/Nasdaq/Russel did not make a lower low (similar to November 2010 low)  
3-  Euro has not declined significantly

Pattern Termination Level: Close below 1309 (SP500)

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