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Wednesday, May 23, 2012

Inflection Point Model (Daily)

"In the name of Creator, most Gracious, most Merciful"


After declining for several days at a very rapid pace, sentiment became relatively soar to justify a 2 day market rally. This rally was not only internally weak, market never broke above critical levels to justify long positions. At the same time, we are still not seeing unanimous bearishness among advisers and investors to justify a bottom. This means that we still need more work to do on the downside. Therefore, this rally will most probably fail and will give way to another round of selling. 

Moreover, according to the wave structure market also needs one more down leg, before completing an intermediate term decline pattern (detailed market structural analysis will be discussed in future posts). Furthermore, recent Put/Call ratio activity also hints towards lower prices. Although market's 2 day rise was not very strong, the Put/Call ratio along with VIX collapsed. This kind of activity does not bode well for the market's immediate future. Lower Put/Call ratio means complacency and complacency leads to market declines. 

After witnessing this curious market action, I decided to re-run both Daily and Weekly IPM Turn Models, to gather some insight about the market direction and possible market bottom dates. (Weekly IPM will be presented later)
According to this analysis there are two IPM turn dates close to each other. The first date is scheduled for May 31, 2012 (+/- 4 days, Higher Probability: -2/+4 days), while the second is scheduled after 4-5 days of the first one. for June 12, 2012 (+/- 4 days, Higher Probability: -2/+4 days)The first date has a lower significance than the second date. 

Based on the optimization results, the next IPM turn date could mark a market bottom. This could be followed by a 6-7 day rally (4th wave), then another decline into later part of June. 

In order for this pattern to play out, the market (SP500) should not rise above 1346; ideally it should test 1320s and then resume its decline by the end of this week. However, if the market does manage to rise above 1346 accompanied by strong internal strength, it would suggest that markets can further rally. Based on the time symmetry aspect, the initial decline from 1415 to 1345 lasted for 6 days, the second decline from 1365 to 1294 lasted for 6-7 days, therefore, it would make sense if the last decline also lasts 4-6 days.

Please note that since primary indices have already confirmed the 8/4 test to the downside, we are now in a downtrend and rallies will typically fail.

Note: Weekly IPM turn window and Market structural update will be presented soon.

2 comments:

  1. Thanks Naqvi, it looks like it will be choppy for a couple of weeks, and back to back IPM windows will add to the choppiness - but the trend with the indices still continues downward (unless it breaks 1350, but I don't think the market has enough steam to do that because no bottom has been put in). Be careful out there! Brad

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