US equity technicals
The last lap
US rebound a little more to go? The DJIA has confounded us over the past fortnight
by rebounding after a three-wave correction instead of the five waves that we
expected (Figure 1). We read this as a sign of a little more upside to the DJI's
rebound, after which the destructive wave "C" should kick in.
In line with our preferred wave count. This is line with our preferred wave count for
the DJIA. Based on our alternative wave count, the index would be in the midst of its
destructive wave "C". Earlier, we put emphasis on the alternative wave count in view
of the potential "head & shoulder" formation which targets 9,750 for the DJIA. The
"H&S" formation is usually the most reliable of all chart patterns and occurs at major
tops and bottoms. It is unusual for the "H&S" pattern to fail but we could be wrong in
this scenario.
Bullish immediate-term indicators. Our expectation of more upside for the index is
supported by upbeat near-term indicators. The daily MACD is trending upwards while
the RSI is just above the 50 neutral mark. The 21-day SMA has cut the 34-day and
50-day SMA from below, which is generally a positive indication of more upside
ahead. Furthermore, the weekly MACD confirmed its bullish "golden cross" last week
(Figure 2). Ideally, the DJIA should hit 11,800-12,000 before coming off.
What about the destructive wave "C"? If we are right about there being a bit more
room to go for the DJIA's wave "c" rebound, the destructive wave "C" is only expected
to kick in between late Sep and late Oct. Our head & shoulder formation (Figure 3)
would be invalid if the DJIA surpassed the neckline at 11,800-11,900, which would
also negate our alternative wave count for the DJIA (Figure 3).
Why we are long-term negative on DJIA
Medium- and long-term bearish on DJIA. We remain very bearish on the DJIA in
the medium- and long-term. The main difference between our alternative and
preferred wave counts is the timing of the destructive wave "C" which would be only a
few months later under our preferred wave count. In Jun 08, the DJIA broke below the
major 34-year support trend line since 1974. Furthermore, as Figure 4 shows, the
DJIA clearly completed the 5-wave uptrend in Oct 02-Jan 08, which should be
followed by the "a-b-c" major correction.
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