Saturday, February 4, 2012

Structural Update

The market is at a very interesting juncture right now. The graph below shows that the market declined in 5 waves from May 2011 top to October 2011 bottom. This decline has been followed by a 3 wave rise. More importantly, all of the sub-waves of the 3 wave rise, were 3 in structure. This structure is not the type of structure, we expect to see at the start of a prolonged rally.

The best aspect of this market structure is that market should start to decline really soon. In fact, if the market (DJIA) rallies another 50 points then this pattern will be nullified. This seems like a perfect shorting setup, with sharp stop above the high.

Furthermore, we are within the later half of IPM turn window. This means that market can top out at any time/ Finally, the global stock proxy (the new index that was mentioned few weeks ago), is still showing that we are in a bear market. In fact, it is sitting at the resistance, as I type this post. This development has certain far reaching consequences:

1- If the market fails at or near current levels then we will resume the downtrend
2- If the market breaks past the current resistance, then we will finally enter a bull market.

Although the US indices entered a Bull market back at 1230 (SP500), however lack of global strength prevented me from committing to the market structure. Now is the moment of truth, about the market structure and future market pattern.

When you combine the 3 wave rally, current IPM turn, VIX based sell signals, complacent sentiment and other indicators, it seems that the environment is ripe for a pull-back. This pull-back can transform into something very strong. However, we will give it time to materialize and see how the market reacts to current technical ambiance.


  1. I personally don't see how the markets can get any higher than where they are. I hoping the market will pull back. They are a bit expensive now.

  2. They are expensive. Although the Markets are almost equal to their April top, Euro is so much lower, Dollar is so much higher, Commodities are no way close to their top of April 2011 and Bonds are near all time highs. Something must give!!! Either Bonds and US Dollar are going to fall, or the market is going to cave in... Intellectually speaking, bond market is the more intelligent market.

  3. Interesting perspective. I've been on, and will reamin on the sidelines (since my funds won't let me short) because the probability of a pullback is greater than a rally (unless the Dow goes up 50 points from current levels which nullifies the pullback). Until the market gives a little more clarity, I'm staying put. Brad


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