Wednesday, July 10, 2013

SP500 Elliott Wave Analysis

Markets have nicely rallied over the last 2 weeks. This rally was predicted in advance by the IPM Model. Now the question is: How far will this rally go? Since there are several ways to perform this analysis including sentiment & Elliott Waves, UST team has developed a propreitary Market Matrix tool to analyze markets under different conditions.

One important component of the Market Matrix is Elliott Wave analysis. Current Elliott Wave analysis of SP500 suggests that we are close to a top, and that current rally should only be treated as a counter trend bounce.

Following chart shows a "Leading Expanding Diagonal" decline pattern. Leading diagonal is a pattern in which market declines in a 5-wave manner, but wave 4 overlaps wave 2. Normally this overlap is a violation of Elliott Wave principals. However, overlapping is possible is rare circumstances i.e. during leading or ending diagonals. Leading diagonals, as the name suggests, occur at the start of a decline phase. And like ending diagonals, these patterns become more valid when majority of market analysts are not looking-out for them.

Some interesting observations regarding current 5-wave decline are:

1- Market top in May occured within weekly IPM Model's Turn window
2- Waves 1-3 = Wave 5
3- Leading diagonal count is not proposed by any prominent elliott wave analyst.
4- Leading diagonal would mark the start of the decline, as market had rallied from November 2012 to May 2012.

The above observations support the basic requirements of a leading diagonal pattern.

However, as we all know that nature of any market can only be confirmed after analyzing the counter-trend move. If current counter-trend move takes on a 3-wave form, it would suggest that primary trend is down. On the other hand, if the counter-trend rally complete a 5-wave rise pattern, it would suggest that previous decline was only correction (corrective triangle) and primary trend is still up.

So far SP500's 2 week rally has taken on a 3-wave (zig-zag) pattern (shown above). This pattern is typical for 2nd wave rises. In terms of Fib relationships, 2nd waves typically retrace 50% to 78.6% of 1st wave declines. In current case, 78.6% retracement will be completed at 1658 level (shown below).

Therefore, there is a high probability that market might be very close to a top. However, it should be noted that Fibonnaci areas are only potential top areas for counter-trend rallies. It cannot be assumed that if the SP500 rises above 1657, it will surely make new highs. In fact, as long as SP500 is below May 2013 highs, there is a high possibility of current rally being a counter-trend rally.

Please note that Elliott Wave analysis is just one aspect of Market Matrix. When Elliott Wave analysis is performed in conjunction with the IPM Model turn data, Sentiment, Trend analysis, Technical indicators, Proprietary models and supporting markets, one gets a high probability count. IPM Model update has already been emailed to subscribers on Sunday, which details out high probability turn window.

1- Wave 1 down complete (Leading Diagonal). Wave 2 in process.
2- Count will be invalidated on a rise above 1687
3- Alternative count (Low Probability): Market completed a 4rth wave triangle in June

In the next update, we will analyze Global Stock Market Index to understand its Elliott Wave count to further underatnd the overall global stock market structure. Furthermore, in July we will be publishing a series of special reports on Gold.

Note: IPM Model has been a very informative tool for market timing. If interested in IPM Model Subscription, please fill out the form below. Model Performance

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