"Markets rallied on the rumor that China will soothe Italy's debt market."
When I read the above mentioned headline yesterday, I thought that how could Trading Algorithm have known about this news in advance and signaled a Sell signal in the morning - before anyone knew about the Italy story? The fact is that UST Trading Algorithm did not know about the news. However, what it knew was that the market structure, sentiment, cyclical model and proprietary indicators were ripe for a bounce. Long behold, we did get a bounce. It is just that Italy's news was assumed to be the reason for this bounce by the financial media. (Last Trade: Short from 1194 to 1254 => +3.3%)
MARKET STRUCTURAL ANALYSIS
Chart on the right clearly shows a completed 5-wave decline pattern from 1204 high (predicted by UST) to 1138 low. This was the primary reason why I posted a blog update on Monday morning stating that we might rally for the next few days. So far, it has turned out to be an accurate assessment.
5-wave decline suggests that the main trend remains down and current rally should end below 1204. The highest probability rally termination range is 1180 to 1193 (SP500). Over the past few weeks, it seems like SP500 is tracing out a sequence of 1s and 2s to the downside. Once the support at 1135 is broken, we will see a very sharp decline to mid 1000s.
On the other hand, Nasdaq is tracing out a 4-wave triangle (shown below). Triangles are consolidations before a final move in the prior direction. Since the larger trend is down, the highest probability is for the triangle to resolve to the downside.
Looking at the longer term picture in terms of SP500, it seems like we are tracing out a bear flag. Recent upside correction should be followed by a final decline to new lows. From a bullish perspective, there is a very low potential for a significant rally because of market's recent erratic gyrations. However, if SP500 can manage to close above 1210 then there will be a higher potential of a sustainable rally.
As published earlier, Inflection Point Model's next turn window is scheduled from Sept 14-Sept 23. Markets have been in sideways correction since August 10, 2011 with a potential double bottom on August 23, 2011 (predicted by Inflection Point Model). Except for few exceptions we have primarily not broken the August 23, 2011 low. This suggests that we are in a sideways to up-phase. And one of the primary tenets of the Inflection Point Model is that if the market rises into the turn window, it will most probably top during the window. Keeping the market structure in mind, it would be highly appropriate for the market to complete its 4th wave correction during the upcoming turn window. In other words, market can top within next few days and then decline into the final low towards the end of September.
There are at least 5 different analytic reasons to assume that markets would bottom around the end of September or early October. This analysis will be e-mailed to subscribers by the end of the month for better market understanding.
In the short term, be on the look out for a down side reversal either Wednesday or Thursday. Trading Algorithm update will be posted tomorrow - 9/14/11. If the reversal completes the H&S pattern shown previously by breaking below 1135 (SP500) then be on the look-out for 1050-1070 level by the end of the month. This will be almost a 10% decline from current levels.