Once again the stock markets are at a point where technicians are checking (and debating) whether this is really a bull or bear market. Insights to help discern the difference can cone from Tlliott Qave analysis when it's applied objectively. The Elliott Wave count of the equities markets, typically on the S&P 500 index, is always interesting to puzzle out, and always much appreciated when it's tracked and updated objectively. Of course I'm thinking of Tony Caldaro and his Objective Elliott Wave (and his site is always in the list at right). Here's this weekend's update from Tony's Elliott Wave Lives On site:
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the Elliott Wave Lives On
by Tony Caldaro
February 20, 2010
weekend update
REVIEW
This week the FED increased the discount rate for the first time since Jun 06. This may have been in response to the rising inflationary pressures reported this week, and a message to the banks to increase lending after reports of record declines in lending. Economic reports, in general, were positive. Home starts/builders index was higher, industrial production and leading indicators were higher, and the Philly FED improved. On the inflation front, both the PPI and CPI rose along with import prices. For the week the SPX/DOW were +3.05%, and the NDX/NAZ were +2.65%. The Asian markets were flat, but European markets were +4.4%, and the Commodity equity markets were +3.1%. Bonds were -0.8%, Crude gained 7.5%, Gold rose 2.4% and the USD was +0.3%. Home prices/sales, plus the Q4 GDP revision highlight the next week.
LONG TERM
We start this weekly review referencing the two special reports posted this week: GSC revisited and the Holiday update. Then we'll try to reference the past and relate it to the present and future. In the "GSC revisited" report posted on sunday we examined the theory of a Grand Supercycle and how it relates history. We suggested, based upon an economic cycle in the emerging US economy, that the GSC began early in the 18th century and not with the official Declaration of Independence in 1776. Under this scenario, the US would have experienced five Supercycles (SC) between 1700 and 1929. The two SC peaks, SC1 1770 and SC3 1857, were followed by two major local wars, the American revolution and the American civil war. In each instance the economy contracted about 10% to 20%. When SC5 completed in 1929, however, it completed a much greater cycle: the multi-century GSC. The decline that followed was enormous. The economy dropped nearly 50%, the stock market dropped 89% in only 34 months, and the economic collapse resulted in a major worldwide war. While the US stock market took only three years to bottom after a GSC top. The English FTSE GSC top occurred earlier in 1900 and lasted until 1940, forty years. We also noted some additional technical comparisons in the GSC report. That depression was worldwide.
From 1932 forward the US stock market, as measured by the DOW, progressed in a five wave sequence which is familar to most you. Cycle wave 1 1937, Cycle wave 2 1942, Cycle wave 3 1973, Cycle wave 4 1974 and Cycle wave 5 2007. Some EW pundits have counted the 2000 top, Primary wave III, as the end the of Cycle wave 5. We, however, tracked the five wave bull market from 2002-2007 right on this blog. The charts are still posted in the chartlink. Cycle wave 5 completed in 2007. After it completed it became obvious that it was a very significant top. More aligned with a Supercycle top than just another Cycle wave top. Now, we are fairly certain that it was a Supercycle top, and nothing like the GSC top and collapse from 1929-1932. This revelation has some current and future implications. First, and foremost, we can no longer compare this SC bear market to the GSC 1929-1932 bear market. We had been expecting alternating waves. That expectation no longer applies. Second, we had been expecting a prolonged bear market, similar to 1937-1942, to accomodate the alternation. That no longer applies. Third, we were expecting a retest of the 2009 lows or lower to complete the bear market. That is still possible but we now have to look at other possibilities as well. This bear market is nothing like the depressionary 1929-1932. In fact, neither China nor India even entered into a recession during this worldwide economic contraction.
After tracking the five wave bull market from 2002-2007 we turned long term bearish in early Jan 08. We expected an ABC bear market. All bear markets unfold in ABC's. As the waves unfolded we observed five waves down into Mar 08, a three wave rally, and then another five waves down into Mar 09 to complete a three wave zigzag. At this point we labeled the completed wave structure as Primary wave A and suggested a 50% retracement rally would be next. A few days after the low we projected a target of SPX 1122 (50%) within the range of OEW 1107 and 1179 pivots. In essence we had turned medium term bullish, but remained long term bearish under the wave alternation scenario. The market rallied in three waves, for ten months, and topped at SPX 1150 in Jan 09. Just before the top we had a long term uptrend confirmation from our quantitative OEW. These signals are quite reliable. While some of our other indicators were also flashing bullish signals we made the decision to track the next downtrend carefully. Since there were only a three waves up from the Mar 09 low, and the market had followed our expectations. A resumption of the bear market would be signalled during the next downtrend, with impulsive waves to the downside. Thus far, that has not occurred.
This downtrend is now about four weeks old and the waves thus far look corrective, not impulsive. Corrective downtrends occur during bull markets, or bear market rallies, not in the resumption of bear markets. Since we no longer require wave alternation between the 1929-1932 bear market and present. And, we no longer require anything more to the downside than what has already occurred, see "Holiday update". We can technically count the decline from Oct 07 to Mar 09 as the entire three wave bear market, if we can count the two uptrends from Mar 09 as impulse waves. In the SPX this is quite difficult to do with out major creative wave counting. In the DOW, however, it is not that difficult, and we posted a bullish count on the charts. In review of some of the other technicals we follow. We observe that, unlike the US, and we posted this in early Jan 10, nine of the thirteen foreign markets we follow already have bullish wave structures. At the Mar 09 low this market was the most oversold it has been since the early 1930's. Plus, the last factor we noticed this week was the four-year cycle.
There have only been three times when OEW has confirmed a long term uptrend in a four-year cycle low year: 1950, 1954 and 1958. All three led to multi-year bull markets. On each occassion the four-year cycle low arrived one year early. Prior to that it was in sync with the waves, and in 1962 it synched up again. The 1950's, btw, was also a time when Debt/GDP was over 100%, and the FED fixed rates low while allowing inflation to aide economic growth. It appears in many ways we've been through the current scenario, with some variations, before.
Let's sum this up. We currently have two potential counts. The one we have been posting since early 2008: Oct 07-Mar 09 Primary wave A, Mar 09-Jan 10 Primary B, and Primary C now underway. This is still possible, since we are still in a downtrend, and there are only three waves up from Mar 09. The second count arises after all the recent research into GSC/SC waves, cycles, etc. It suggests, and is posted on the DOW charts, that the bear market ended in Mar 09. The anticipated 50% retracement rally, was actually the start of a new 70-80 year SC bull market. The three waves up, thus far, are only Major waves 1-2-3 of Primary wave I of Cycle wave I of this bull market. Should the current downtrend conclude with alternation with the Jun/July downtrend, and hold the 10% correction threehold, it will be labeled Major wave 4 with Major wave 5 to follow. For now we'll continue with the SPX count as the primary count until this downtrend concludes.
MEDIUM TERM: downtrend
After a six month uptrend July 09-Jan 10 the market entered a downtrend on Jan 19th. This, we anticipated at the time, was the most important downtrend since the final downtrend into the Mar 09 low. If it was impulsive we could assume the bear market has resumed. If not, the potential was there for higher highs in the months ahead. On the hourly charts we could observe impulsive waves from SPX 1150-1072, a rally to 1105, then another impulsive wave to 1045. We counted it as a i-ii-1. However, on the OEW charts, we noted that the decline really didn't look that impulsive at all. It looked more like a zigzag than a i-ii-1. As the market started to rally from the SPX 1045 low, it continued to retrace more and more of Minor wave 1. By this thursday it had retraced that entire decline when the rally hit 1108. This increased the expectations that a zigzag had formed between SPX 1150 and 1045. We are also considering an additional count of a Int. wave i and an irregular Int. wave ii. Zigzags are formed by two implusive waves with a counter rally in between. They are not impulsive waves because impulsive wave require five internal waves not three. This downtrend then is not what was expected to resume the bear market. It looks more like a correction in an ongoing bull market.
SHORT TERM
Support for the SPX is at 1107 and then 1090, with resistance at 1133 and then 1168. Short term momentum is displaying a negative divergence on the hourly charts and is a bit overbought on the daily charts. The decline from SPX 1150 to 1045 was 105 points and 9.1%. The decline in the DOW was 8.3%. We noted this near the lows because we had observed that at no time during the 2002-2007 bull market had the DOW corrected more than 10%. During the bear market that 10% threshold was broken quite early. Yet since March 09 the only correction prior to this was Jun/July: SPX -9.1% and DOW -8.9%. From the Feb 5th low at SPX 1045, the SPX has already rallied 67 points and retraced 64%. This is generally considered about the maximum retracement for a counter-rally during a downtrend. If the SPX clears the OEW 1107 pivot range then we would suspect that the low for this downtrend was at SPX 1045. Ideally, the SPX should top soon and turn lower to, at least, retest that 1045 low or lower. This would give us more information about this downtrend. Plus set up a potential alternation between the Jun/July correction and this one. The inflection point, we spoke about last weekend, has been resolved to the upside. The next decision for this market is bull or bear. Best to your trading!
FOREIGN MARKETS
The Asian markets were flat on the week with China closed. Hong Kong lost 1.9% and the rest were slightly positive.
The European markets had a good week +4.4%. All were within a +4.0% to +4.6% range. The SMI confirmed another uptrend.
The Commodity equity markets averaged a +3.1% week.
COMMODITIES
Bonds dropped 0.8% on the week. Rates appear to be in another uptrend.
Crude rallied for most of the week gaining 7.5%, despite a rising USD. It has rallied $10 in two weeks.
Gold gained 2.4% on the week, as Silver +5.0% led gold higher.
The USD gained 0.3% in a volatile week. The EUR lost 0.1%, (certainly appeared worse), and the JPY lost 1.7%.
NEXT WEEK
Tuesday kicks off the week with Case-Shiller and Consumer confidence. On wednesday we have New home sales, then on thursday the weekly Jobless claims and Durable goods. Friday ends the week with the first revision to Q4 GDP, Consumer sentiment, Chicago PMI and Existing homes sales. As for the FED. On wednesday FED chairman Bernanke gives testimony to Congress in his Semi-Annual monetary policy report. Then he testifies before the Senate, same subject, on thursday. On friday FED governor Tarullo heads a panel discussion in NYC. Best to you and yours this week. It should be an interesting one.
CHARTS: http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1606987
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