Market Structural Analysis

As markets have rallied over the last few days, Euro has declined. This behavior has been an ominous signal in the past. One key reason behind this sudden decline in Euro and surge in US Dollar is that the Federal Reserves' meeting minutes (yesterday) suggested that "Fed is running out of bullets." (MarketWatch) 

This news headline clearly shows how dire the situation might be i.e. If Fed cannot save us then who can? Add this to Fiscal Cliff - Part 2, which we will be seeing in the congress over the next 2 months over the debt limit issue, and we get a perfect "Headline based" recipe for a sharp market decline.  

This is exactly what is evident on the internet, as many blog writers, individual investors and brokerage houses are trying to fade this rally, based on the above mentioned socio-economic risks. However, a detailed market structural analysis suggests otherwise. 

Based on experience, Elliott Waves evolve over time. Since this evolution can take different shapes, it is very important to know the time-wave relationship. In this regard, the following preferred count was presented on the Blog for DJIA. This was the preferred count because it aligned with the IPM Model's turn dates. 

Predicted

Actual

Above chart shows the market structure, as it unfolded in December. Therefore, the 1,2 - 1,2 structure was validated by the market action. 

Today's Elliott Wave Structure

Since the 1,2 - 1,2 market structure was validated by the market, we will keep on analyzing this structure as our primary Market layout. Following chart shows DJIA & SP500 structures with (I,II - 1,2 - i,ii) count on them. According to this count, market should continue to rally in the near term with brief pauses here and there. 

If this structure holds, it would suggest that we are in a 3 of 3 wave. These waves tend to be the strongest of all. Therefore, market should rally stubbornly after completing the near-term 2nd wave. Please note that recent rally did result in sharp declines in VIX and other sentiment based indicators, therefore, markets might need a brief pause before resumption (which might have been completed by yesterday's decline).

The 3 of 3 market case flows well with the next IPM Turn date and the political uncertainty surrounding the markets (mentioned at the start of this post). Markets typically do well when there is geo-political uncertainty. For example, even with a fill-blown Euro crisis in the Europe, German Dax index had its best year in 2012 since 2003 i.e. up 30%. 

In order for this structure to remain valid, market should not violate the following levels:

SP500: 1399

DJIA:  12,887

Although there is one other alternative wave structure (diagonal pattern), but it is such a low probability in the current backdrop of sentiment, IPM Turn date and market internals, that it will not be shared with readers to avoid confusion.

Conclusion:

We are in an uptrend. 3 of 3 waves are very strong waves, and can result in persistent market rise. Next area of the market pause will be at the upcoming IPM Turn date. Market should stay above the critical levels stated above. Global markets remain in a bull market, and we can soon see another rally leg. In a bull market, surprises are typically to the upside.

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