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the ELLIOTT WAVE lives on
Market analysis using proprietary Objective Elliott Wave techniques
by Tony Caldaro
January 22, 2010
weekend update
REVIEW
What a short trading week! The uptrend made its absolute high near tuesday's close at SPX 1050. Then in just three days it dropped over 5% to confirm a new downtrend. This was one of the fastest peak price to downtrend confirmation we've ever seen. The VIX spiked up from 18 to 28 in just two days. Economic reports for the week were sparse. The home builders index continued to bounce along the bottom. Housing starts fell, as did the Philly FED, and weekly jobless claims rose. On the positive side, the PPI was moderately positive and leading indicators edged up as well. For the week the SPX/DOW were -4.0%, and the NDX/NAZ were -3.7%. Asian markets were all lower -3.6%. European indices were all lower as well -2.8%. Commodity equity markets were all lower too -3.8%. Bonds were +0.50%, Crude was -4.9%, Gold -3.4% and the USD was higher +1.4%. The week ahead involves mostly housing reports, the FOMC meeting, and Q4 GDP.
LONG TERM: bear market
In the Dec 12th weekend update, and since then, we detailed a massive convergence of technical/time relationships coming together in Jan 2010. All these relationships were projecting an uptrend high in January around SPX 1160. There were fibonacci relationships between Major wave C and Major wave A, and its internals, projecting a price high between SPX 1158 and 1162. We were also expecting the lower range of the long term OEW 1168 pivot to be reached. The 2:1 time relationship between the Major waves of Primary B equalled the 2:1 time relationship between the two Major waves of Primary A in January. We also had fibonacci numbers 3, 5 and 8 (in hundreds) at work. The price levels of the Major waves at the beginning of the last bull market, fit the highs of the Major waves during this Primary wave B rally. And, while all this was setting up, negative divergences were starting to appear on the longer term charts. This type of convergence is quite rare. The chart posted on that update is reprinted below. Then in the Jan 9th weekend update we noted that OEW had confirmed a long term uptrend. We are going to cover the implications of all this technical data in the following paragraphs.
Two years ago, to the month, OEW confirmed a long term downtrend: bear market. We immediately anticipated that the bear market would unfold in three larger waves because all OEW bear markets are three wave structures. As the waves (trends) were being confirmed by OEW we tracked the decline from OCT 07 at SPX 1576 to Mar 09 at SPX 667. We labeled this 5-3-5 zigzag Primary wave A. Within days of the low we projected the potential for a 50% bear market retracement rally near the SPX 1120 level. There were a few starts and stops along the way, and the rally took twice as long as expected. Nevertheless, the market rallied from Mar 09 at SPX 667 to Jan 10 at SPX 1150. This rally took the form of a simple zigzag, The internals of each uptrend, however, were quite choppy and nothing like an organized impulsing bull market. This week the uptrend, Major C, from July 09 at SPX 869 to Jan 10 at SPX 1150 ended. Immediately the market started impulsing to the downside, albeit it was only three days of trading.
As Primary wave B was unfolding, we noted that it was taking too long to be part of a huge bear market zigzag collapse like 1929-1932. We opted for a more conservative large ABC flat formation like 1937-1942. The recent OEW long term uptrend confirmation fits that scenario quite well. The 1937-1942 bear market also had a long term uptrend confirmation before it rolled over. In Sept/Oct 09 we projected, upon completion of Primary wave B, that Primary wave C would be a five wave structure that would retest the Mar 09 SPX 667 lows in the latter part of 2010. This would coincide with the four year presidential cycle low in 2010. In order for this to unfold, as expected, the decline from SPX 1150 should be five Major waves. This new downtrend should be the first of those Major waves. As a general guideline, and certainly not to be traded on alone, the Primary wave C decline should look something like this: Major 1 (SPX 961), Major 2 (SPX 1061), Major 3 (SPX 768), Major 4 (SPX 848) and Major 5 (SPX 667). Remember, and this is important, each of the three downtrends need to unfold in five waves. In order for the bear market to resume they have to impulse with the major trend, which is down. The two uptrends should be corrective abc's.
To cover all the probabilities we certainly have to take into account the recent long term OEW uptrend. The resumption of the bear market from SPX 1150 is not a certainty. At least not right now. This downtrend has only just begun. Despite the choppiness of the Mar 09-Jun 09 and the July09-Jan 10 uptrends, this market could shift into an even larger Primary B wave, or even a bull market. Long term OEW uptrends are often, (70% v 30%), associated with new bull markets. To get a better understanding of what is actually transforming in the market we must observe this downtrend quite carefully. As we have noted previously. If the downtrend impulses down in five waves then it is highly likely the bear market has resumed. If the downtrend appears corrective, a choppy abc pattern, then we are dealing with one of these two scenarios: an even larger B wave, or a bull market. The action in the market over the next several weeks should give a clear indication of what to expect over the next several months. Since this market has stayed within the parameters of a multi-year bear market ABC flat, we continue to favor that scenario.
MEDIUM TERM: downtrend
The Major wave C uptrend from SPX 869 to SPX 1150 (281 points), was nearly equal to the Major wave A uptrend from SPX 667 to SPX 956 (289 points). This is quite interesting since Major wave C took six months to unfold, while Major A took only three months. The upside momentum of Primary wave B was certainly waning. At the completion of both uptrends there was a negative divergence on the weekly charts. It is also interesting to note that at the completion of every Major wave since Oct 07 there have been corresponding divergences. While Major wave A was relatively easy to count on a short term basis. Major wave C was quite complex and required two different views to get a clear picture, one posted on the SPX charts and the other on the DOW. This is sometimes necessary, expecially during extensions. Despite the complexity of the pattern the current labeling pattern remained on track. Intermediate wave C from SPX 992 to SPX 1150 (158 points), was nearly equal to Intermediate wave A from SPX 869 to SPX 1039 (170 points).
The three day decline from SPX 1150 into friday's SPX 1090 low was the biggest short term drop since Feb 09. In fact, the DOW wiped out two months of upside progress in just these three days. At the SPX 667 low in Mar 09 the SPX surged over 5% in just three days. This week it dropped over 5% in just three days. Another interesting relationship. Before this downtrend bottoms the weekly RSI should get sufficiently oversold.
SHORT TERM
Support for the SPX is at 1090 and then 1961, with resistance at 1107 and then 1133. Short term momentum was extremely oversold at friday's close. Since we are expecting this downtrend to be Major wave 1, of a five wave Primary wave C, we anticipate that it will unfold in five Intermediate waves. The first Intermediate wave is underway now. Therefore we have labeled the initial decline from SPX 1150 to SPX 1129 (fibonacci 21 points) as Minor wave 1. And, the rally from SPX 1129 to SPX 1142 (fibonacci 13 points) as Minor wave 2. Minor wave 3 of Intermediate wave 1 is still unfolding. Should the fibonacci numbers continue. Minor wave 3 could bottom at SPX 1087 (55 points).
Considering how oversold the market was at friday's close this is quite possible. If the bottom falls out we may be looking at SPX 1053 (89 points). In either case, if Primary wave C is anything like Primary wave A, all the fourth wave rallies should be quite weak. It has been awfully quiet for many months with low volume and lowering volatility. By the appearance of the upward spike in the VIX that has likely ended. Best to your trading, and be careful!
FOREIGN MARKETS
The Asian markets were all lower -3.6%. Only China's SSEC and Hong Kong's HSI are in confirmed downtrends, as they have been for a while.
The European markets were all lower -2.9%. Only Spains's IBEX is in a confirmed downtrend.
The Commodity equity markets were all lower as well -3.8%. Canada's TSX is now in a confirmed downtrend.
COMMODITIES
Bonds remain in a downtrend, but gained 0.50% on the week.
Crude remained under selling pressure -4.9% on the week. It has already retraced $10 of the $14 uptrend and is quite oversold.
Gold was under selling pressure this week as well -3.4%. It's very close to retesting the $1075 Dec low to complete the expected flat.
The uptrending USD gained 1.4% on the week. The downtrending EUR was -1.7%, and the JPY +1.1%.
NEXT WEEK
Busy week ahead. Monday at 10:00 kicks it off with Existing home sales. Tuesday we have Case-Shiller home price index, the gov't FHFA home price index, and Consumer confidence. On wednesday New homes sales. Then thursday the weekly Jobless claims and Durables goods orders. Then on friday Q4 GDP, (estimates are over +4%), Chicago PMI, Consumer sentiment and the Employment cost index. The FED starts their two day FOMC meeting on tuesday. On wednesday A. Director Greenlee gives testimony at the Atlanta FED. Then on friday vice chairman Kohn gives a speech at the FDIC in Virginia. Best to your week!
CHARTS: http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1606987
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