Market Analysis - May 15, 2012

The markets have been in a persistent downtrend since early April 2012 peak. It was mentioned on this blog on April 5, 2012 that the markets might have already topped. So far this analysis, seems to be true. There can be myriad of reasons given about the recent decline, such as Euro zone elections, political uncertainty and others. However, no one talked about these potential reasons a month ago. At that time, the only thing everyone talked about was the bullish prospects of the stock market and the associated rationale. For example, easy monetary policy by the Federal Reserves, picking up of US Housing sector and fixing of Euro zone problems.

These observations highlight the importance of objective stock market analysis. Please note that I have mentioned this several times before that accurate analysis is a gift of God.

Now coming to today's market, it was mentioned in the comments section one week ago that the market was supposed to put in a short term bottom with in the turn window. Although the market did bottom in the turn window, the bounce turned out to be very subdued i.e. it only retraced around 38% of the previous decline. This behavior tells us that the market is trading heavy and can decline further. 


In fact, several markets have completed the 8/4 test to the downside which means that the markets are in a downtrend. As long as the market remains below 1376 and ultimately below 1416, market remains in a down trend. Although the IPM turn model has not been run, the market's next turn date is estimated to be near the end of the month. Therefore, market can continue to decline in May.


Update May 15, 2012 - 1:50 PM

The market pattern shown above clearly suggests that the market is entering the 3 of 3 wave down. Some might regard this pattern as an ABC decline, which would be followed by a rally. However, the market turn date is far away, which means that markets should not turn soon. Therefore, the highest probability count at the current moment is a 1-2, 1-2 count, which means that the market decline will accelerate soon. 3 of 3 waves are the strongest part of the wave structure, and are accompanied by strongest momentum. 

In order for this structure to materialize, market should start declining sharply beginning today/tomorrow. If the market rises above 1366 level then we would have to re-evaluate the situation. Therefore, a good stop location is above 1366. As mentioned above, the market is in a primary downtrend. Hence, rallies are prone to failure until unless market completes the 8/4 test to the upside (which will take another 2-3 months).

Note: Yesterday market generated a VIX based buy signal. If the market does not start to rally soon based on this signal then the market's decline will accelerate to the down side. This observation is in harmony with the earlier analysis.