Friday, November 9, 2012

Post Election Market Structure

Today I had three options to write on:
1. Conclusion of the Stock Market and Presidential Elections series
2. Apple: The perfect case for social mood analysis
3. Market structural analysis and IPM

After careful consideration, I have decided to write on the market structure because it appears that we are very close to a market turn. IPM Model subscribers already know the turn date and they should be ready.

We will analyze charts of SP500, Nasdaq and DJIA, to get a better understanding of the market.

After going sideways in July, markets rallied strongly till September. After September markets started creating divergences. By the time October top came (as predicted by IPM model), only DJIA made a new marginal high. This behavior is classic truncated top behavior.


Since October top markets have declined very sharply and in clear 5 wave fashion (shown above), with a slight possibility that instead of 5-wave decline we are seeing 1, 2 and i, ii, which will be followed by a strong wave (lower possibility because the IPM turn date is very close).

The 1/2, i/ii case is only a high probably through the SP500 charts because wave 4 is overlapping with wave 1. But we have seen this in past and therefore, it should not be considered a concrete evidence that we will further decline in wave 3 immediately.

In the big picture, 5 wave decline means two things:
1- The primary trend is now down, as confirmed by the 8/4 test (market has declined about 30 points from the point of completion of 8/4 test).
2- We should soon see a bounce in the market after completion of the 5th wave (which might have completed already).

It is so very interesting to see how the Elliott wave structure, elections rally and the subsequent decline, 8/4 test completion and other market matrix measures came to get aligned with the upcoming turn date. This shows us that neither markets are random, nor are they news driven. Markets path is predetermined by some other power (nature/God/social mood). No matter what one might call it, markets are very intriguing.

Please note that the upcoming rally will be short-term in nature because after a 5-wave decline, we typically get 3-wave counter trend rallies. As a first signal that the market has bottom for the short term ( ~1 week), market will rally above 1385. However, one should use this opportunity to identify a sweet spot to short the market because we will soon decline into the next turn date. A rise to new high above 1464 will invalidate further decline scenario. Therefore, as mentioned in the comments section of the last post, please use specific triggers to identify trade entry and use risk management to avoid significant posses if the market does not go in your direction immediately.

Based on the Elliott eave analysis, market should rise to around previous 4th wave area i.e.  around 13150 to 13250 in DJIA and 1420 to 1435 in SP500. This is typical retracement area for 2nd wave.

The decline which will follow this rise will govern the nature of market action over the next year or so. If the market declines very sharply and the negative breadth increase to suggest that we are in the 3rd wave, this would mean that the big decline has started and one should get ready for serious losses. On the other had, if we only see a 3 wave decline into end of November (from October top) then that would suggest that we still again rally. In both cases, there will hopefully be a substantial Santa Clause rally either to new high or to lower high.

We will keep the subscribers informed about the important turn dates so that you can prepare for upcoming market turns.

If interested in these updates, please fill out the form below. 

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