Saturday, February 12, 2011

Detailed Market Analysis (Mid 02/11) - Part 2

Lets look at some supportive Market Structures and Elliott Wave patterns in Nasdaq (Comp) and Financials (XLF), for better understanding of the current scenario.

Nasdaq (Comp):

This image shows Nasdaq Composite Index since 1999. Although market has almost recovered all its losses of 2007-2009 bear market, it is still far below its previous highs. In Stock Market Analysis - Nov 7, 2010, it was stated that there is a potential that Nasdaq can rise up to 3000. I still feel like that, but right now there is a potential double top forming in the Nasdaq index. This double top could lead to the much awaited intermediate term decline.

Like SP500's daily chart, Nasdaq's daily chart (shown on the left) shows a similar pattern. According to this charts, after a decent decline in May - June 2010 time frame,  market has been going up for the last 6 months. Interestingly, market has traced out a clear 5 wave structure, which normally should lead to a pull back.  

Finally, the third chart shows 15 min COMP data. This chart also clearly demarcates a 5 wave rise since late January 2011 low. 

Based on the above mentioned analysis, Nasdaq's structure is ripe for a pull back. There are varying opinions for the degree of the pull back, and we will discuss them with Sentiment and Cyclical analysis. 

Financials (XLF):

Similar to Nasdaq, Financials are also exhibiting a potential double top pattern on the daily time frame. Very recently, financials carved out a triangle pattern, like they did in October 2010. In October, break of the triangle lead to a sharp rally and then a sharp decline below the start of the rally. Following statement was written in the Stock Market Analysis - Nov 7, 2010, "Financials have recently rallied after consolidating for weeks in a triangular shape. Post triangle rallies are usually last spikes. Therefore, rally in the financial stocks might soon get exhausted." 

Recent triangle has also led to a sharp rally up to $17 level. But this rally has shown overlapping waves. Overlapping waves are indication of an ending diagonal. Since post triangle moves are typically terminating moves, this ending diagonal in conjunction with a potential double top is pointing to a potential upcoming correction.

Market is potentially approaching a risky area, where risk-reward ratio is too high. Therefore, one should clearly define his risk, if he want to play this game.

"Contentment is the capital which will never diminish" Hazrat Ali A.S.

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