Friday, July 20, 2012

Earnings and Market Structural Overview

"In the name of God, the Most Gracious, the Most Merciful"

Technically speaking, the market should decline for the next 1-2 weeks, and then rally into the 2nd week of August IPM turn window. The road map chart showed a green arrow until the end of August because previously I thought the IPM turn window was in the end of July. However, when the exact date was calculated it was farther than I had initially thought, leaving behind only two options:

1- Market declines now and then rises into a top
2- Market continues to rise till the August turn date for a top

As the Market structure matured and divergences appeared, the options were narrowed down and levels were outlined. Yesterday, DJIA came with 40 points of the critical level.

Please note that Q2 GDP number coming up next week followed by the FED meeting in early August, this can be a fundamental catalyst to move stock prices (QE3 announcement?). On the other hand, news making earning reports have already been reported and there is no momentum in the market based on these earning reports. So we should be careful. 

Structural Analysis

Bear Case - High Probability: As shown below, if the market is about to embark on a down move, market should not have risen above 1391 in SP500 or 13010 in DJIA. The reason is that according to Elliott Wave theory principals, 3rd wave cannot be the shortest wave in case a diagonal pattern is being formed. Therefore, if the market rises above 1391 then the diagonal possibility will be eliminated. Furthermore, the pattern within the diagonal shows a series of 3 wave moves. This kind of behavior, symbolizes correction rather than new rally phase.

Bull Case - Low Probability: On the other hand, since one can also say that the market is tracing out higher highs and higher lows, it might be about to break-out in wave 3 (the strongest move to the upside). Although it is a lower possibility because of internal structure of these higher highs and because of technical divergences among market indices, we have shown this possibility in the following plot.

Note: The best part is risk management levels.

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