Structural Update - March 30, 2012

Over the last 2 weeks, market has been going sideways but no sell signal was generated. After analyzing the data, and the fact that we are in the later half of the turn window, it seems like we are about to start rallying for the next week or two.

Following chart shows the immediate market structure and highlights the fact that we have almost completed second wave down (of the last rally phase). This will be followed by a powerful rally. In case, market (SP500) manages to decline below 1380, then it would mean that we have already topped for the intermediate term.

In the broader scheme of things, market is in the later stages of the uptrend, which could last for another 2-3 weeks. Furthermore, right now the optimism is not very elevated to signal an immediate market collapse.

Curious Market Action

Market is defying all odds and continuing to rise. It seems like the support that market was getting from Euro and gold has vanished. The Euro has completed its 8/4 test to the downside, and is ready to accelerate its decline.

According to EW count, US stock markets are in the last rally phase since Dec. low. Under these circumstances, it would be interesting to see what dates are generated by IPM turn model. The next turn date could be a significant top.

I remember, last time when the Weekly IPM was run in January, it said that the next weekly turn would occur after 8-9 weeks. From January, 8-9 weeks take us to the end of March. We will also re-run the weekly IPM model for better estimate.


Last two IPM turn dates:


Early February Market Turn Date: DJT, IWM, Financials, and also SPX, Nasdaq (expanded top) - Topped
Early March Market Turn date: DJT, IWM, Financials, DJIA etc bottomed

Details will be provided later.

Euro Based Market Signal

The market has rallied nicely over the last two days. At this point, I would like to analyze the Euro to get a better understanding of the prospective future direction of the US indices.

EURO
The following Euro plot highlights the fact that the Euro rose in 3 wave since January low, and recently Euro has declined in 5 waves. This means that the immediate Euro trend is down. At the same time, the optimism around Greek bailout and LTRO would further push the Euro down.

Please note that Euro is currently undergoing its own 8/4 test to the downside. Although Euro 8/4 test has not been as accurate as SP500, it is something to keep in mind.

SP500
After declining sharply for 2-3 days, SP500 regained almost 80% of the decline within last 2 days. Some investors might be considering that the rally is over. However, according to our analysis, markets typically current 3-4 weeks after a 2-3 month rise in stock prices. For example: Dec 2010 to Feb 2011 rally was followed by 4 week correction, and Sept 2010 to October 2010 rally was followed by 3 week correction. This assumption takes us to the later half of March, as the market bottom period. Furthermore, this period also coincides with the next IPM turn date.

Although certain indicators signaled panic with Tuesday's decline, we are not seeing widespread pessimism to signal market bottom. Therefore, it will be prudent to stay on the sidelines.

Therefore, if the market breaks above the latest highs (1376 - SP500), and stays above that level for 2-3 days then one can go long. On the other hand, indicators are suggesting that current rally is a suckers rally and  just a brief pause before the next decline phase.

If the Trading Algo generates a buy signal, we will keep you updated.
  

Market Structural Overview - Another Perspective!!

Over the weekend, I decided to look into the case of potential market top with in the current IPM turn window. UST has always believed that it is always prudent to analyze the market from a holistic perspective i.e. both Bull and Bear aspects of the market. And for that reason, Market Matrix and other unique market analysis techniques were introduced.

From a structural point of view small caps, financials and Dow transports showed that the market topped at the early February turn date, and have corrected since then. However, when I researched multiple market indicators via Market Matrix (Sentiment, Technicals and supporting indices), it seemed like there was not a lot of fuel left in the market to launch a sharp rally.

As a result, I closely analyzed the EW pattern of SP500 & Nasdaq because these two indices did not correct during February. Instead, they continued their slow ascent during the last month. And the findings were pretty much in contrast to what was being depicted by other indices i.e. These indices are much closer to a top than to a bottom!!

Analysis
The following charts (SP500 & Nasdaq) show a possible ending diagonal pattern. The significant aspect of this pattern is that it is a terminating pattern i.e. markets decline once this pattern is completed. At this point, it seems like this pattern is almost complete. Moreover, since over the past few weeks US indices have slowly grinded higher in a sequence of 3 overlapping waves, it further amplifies the possibility of an impending Ending Diagonal in SP500 and Nasdaq.

This chart pattern has taken place in parallel with a sharp decline in Euro (after the LTRO by ECB). If this decline turns into something significant then we will be more cautious. However, right now we are not bearish. We will just stay on the sidelines till the next buy signal is generated by the Trading Algorithm. We will be looking forward to buying again at the next turn date or when a buy signal in generated by the Trading Algorithm.  

Summary

The above observation in conjunction with persistent bullishness in sentiment surveys and warning signals from the Market Matrix, is suggesting that the bullish trend is approaching a road block within the IPM turn window (at least for the next couple of weeks).

For long-term investors this is not a reason to exit the market, but it would be prudent to lighten up on a close below 1360 (SP500). This will give you the opportunity to buy at a lower price or after the risk of correction has been reduced i.e. we are out of the turn window.

Interesting - Market Corrected in February!!

There have been some very interesting developments in the financial markets during the month of February, along with today's more than expected LTRO announcement. 

The last turn date was scheduled for early February (Structural Update). Since then the markets have not made a lot of progress. Although it seems like SP500, Compq and Nasdaq kept rising throughout the month, most of the major indices including Russell 2000, Financials, Transports and DJIA, experienced sideways market action after the first 3 days of February. 

DJIA

The first plot on the right highlights the market pattern for DJIA since November bottom. It is clear that the market has traced out a sequence of 4 waves up till today. Which leaves the possibility of 5th wave open. This 5th wave rally could last for 2-3 weeks (until next IPM turn date). This rally would clear the 13000 level, which could result in a self-feeding rally.

Dow Transports
Dow transports show a clear corrective (overlapping pattern), since the last turn date. This shows that the market was in a correction mode since early February. Furthermore, many pundits are assuming weakness in transports as a signal for market decline. However, at this point it seems like we will first see a rally based on the market structure. This would also negate the observation of a lot of market pundits.

Russell 2000
Small caps have a similar pattern as DJIA. Typically, it is not a good idea to short a market which has been net sideways for a month, after a sharp rally. So one should be watchful of an impending rally.

Apart from these 3 indices, financials, real estate and other major rally contributors are showing similar trends, except for SP500 and Nasdaq. However, it is possible that these indices have completed an upward slanted correction ( a pattern last seen in Sept 2009 to Oct 2009)

These plots clearly highlight the possibility of renewed rally, especially because of the IPM turn date. This would mean that markets have completed the much awaited market correction through time and are now ready to rally again for the next few weeks. This will take on even more importance because a lot of financial experts are waiting for the markets to correct before jumping back in. 

Next few days will highlight the market's course of action depending on whether the market continues to rally beyond the IPM turn window, which expires on March 6, 2012. If the market falls below 1350 (SP500), it would be a signal that the market has topped and will decline for the next couple of weeks.

Note: Tomorrow we have the labor numbers. Is that the new catalyst??