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.
DJIAThe 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 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.
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??