The market's "surprising" strength made analysts of Elliott Wave Theory (EWT) scramble recently - except not really Tony Caldaro, as we know. We appreciate being able to feature Tony's weekend updates. They're full of insightful analysis, which is also why we keep his site and daily updates feed at the right side of the page (thanks again Tony!). Let's find out what he's seeing and saying today:
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the Elliott Wave Lives On
by Tony Caldaro
March 27, 2010
weekend update
REVIEW
The FOMC minutes were released on tuesday and it appears the FED will maintain low short term rates until the market forces them to raise them. Economic reports for the week were mostly positive. ISM services continued to expand, while pending homes sales and wholesale inventories rose. Consumer credit contracted after a one month rise and the weekly jobless claims were higher. The US markets had a pullback during the week but still managed to tack on gains while the DOW touched 11,000 for the first time since Oct 02 2008. For the week the SPX/DOW were +1.0%, and the NDX/NAZ were +2.0%. Asian markets gained 0.9%, European market gained 0.8%, and the Commodity equity markets gained 0.7%. Bonds were -0.1%, Crude added 0.1%, Gold gained 3.1%, and the USD added 0.3%. Next week will be highlighted by the CPI, Retail sales and Options expiration.
LONG TERM: bull market
This week we'll start with the very big picture and work our way down to the details of the current uptrend. This is sort of like mapping out a forest before studying its growth patterns. We know from public sentiment readings that about two-thirds will disagree with our current bull market view, and about 90% of those in the EW world. Nevertheless we're trying to be objective as possible using all the public data available.
The EWT defines how to track the investor psychology cycles that create bull and bear markets. Some of these cycles last for years, larger ones last for decades, and the largest one known lasts for a couple of centuries. When attempting any sort of EW analysis it is always best to start with the most significant low one can find. Then start the analysis from that point forward. The most significant low in the 125 year history of the DOW occurred in 1932. From September 1929 to July 1932 the DOW lost an incredible 89% of its value in just 34 months. The great depression that followed is legendary. That was clearly the end of the two century Grand Supercycle that started at the beginning of the 18th century when North America was still a colony. From that point forward the next two century Grand Supercycle began.
Within every bull market cycle, (whether it be years, decades or centuries), there are always three impulse waves separated by two corrective waves. This is the typical five wave structure of a bull market. Bear markets are always three wave structures, and corrections to the previous bull market cycle of similar degree. Therefore within a multi-century Grand Supercycle there are five Supercycle waves. We identified the five Supercycle waves of the last Grand Supercycle in a previous post. We now have identified the completion of the first two Supercycle waves of the current Grand Supercycle: Supercycle wave one July32-Oct07, and Supercycle wave two Oct07-Mar09. The next multi-decade Supercycle bull market, wave three, started in March 2009. Hard to believe isn't it.
One has to remember, however, that stock market values are quoted in nominal prices; the current price without any regard for inflation or seasonality. For example, at the July 1932 low the DOW was trading at 41. When the DOW ended Supercycle wave one in 2007 at 14,198, what did that 1932 low at 41 really represent in current dollar terms? 500? 1000? 2000? In real dollar terms how much did the DOW actually appreciate in those 75 years? For an easy comparison of one known value to another let's compare the value of the DOW to the price of one ounce of Gold during this entire period. At the 1932 stock market low the price of Gold was $20.67/oz, and at the 2007 stock market high Gold was $745/oz. At the 1932 low it cost almost exactly two ounces of Gold to buy the DOW: $20.67/oz at DOW 41. Then in 2007 if one would have sold the DOW at 14,198 they would have received nearly exactly 19 ounces of Gold. While the DOW appreciated in nominal terms from 41 to 14,198 during that 75 years. In real terms, real dollars, the DOW went from 2 ounces of Gold in 1932 to 19 ounces of Gold in 2007 for an actual gain of 850%. As you can see over the bullish multi-decade time span of a Supercycle wave nominal stock prices can be very misleading. Over the short term of months and years their impact is far more significant.
Let's say our imaginary investor decided not to sell the DOW at 14,198 for 19 ounces of Gold in Oct07 and waited. That's when the Supercycle wave two bear market began to unfold. Then at the exact bear market low of DOW 6,470 in Mar09, only 17 months later, our imaginary investor panicked and sold the DOW for Gold. With the DOW at 6,470 and Gold then at $928/oz. our imaginary investor would have received barely 7 ounces of Gold. A loss of 63% in real dollars in just 17 months! In nominal terms the DOW dropped from 14,198 to 6,470 for a loss of 54%. Notice how closely the nominal price compares to the real price in the short term, and how there is an almost meaningless comparison in the long term. The difference between nominal prices and real prices over the long term is caused by the continuous devaluation of a fiat currency through debasement and inflation. Keep this in mind as Supercycle wave three unfolds over the next several decades.
MEDIUM TERM: uptrend hits new high at SPX 1195
To quickly review before we move forward. A multi-century five wave Grand Supercycle (GSC) started in 1932. The first wave Supercycle (SC1) one ended in Oct07, and the second wave SC2 ended in Mar09. The third wave SC3 is now underway. Within each Supercycle are five Cycle waves. Typically the first bull market after a GSC or SC low is of the Cycle wave degree. Off the 1932 GSC low, for example, the first bull market was a five year Cycle wave [1]: 1932-1937. Since we can not pre-determine how much time this current bull market will take to unfold. It is important to observe how the five Primary waves unfold during this Cycle wave bull market. Primary waves are the next waves of one lesser degree. As we mentioned in yesterday's special post, the corrections during the early phases of a bull market provide some guidance as to how the overall wave structure will unfold.
From the Mar09 low the first uptrend rallied from SPX 667 to 956 by Jun09. This was followed by a simple multi-week zigzag to SPX 869 by July09. Then a lengthy uptrend ended in Jan10 at SPX 1150. Yet, this uptrend was also followed by a simple multi-week zigzag to SPX 1045 by Feb10. Since the first two corrections did not alternate in wave structure, (see the four rules posted yesterday), the first two uptrends can not be of the same degree. Therefore, we have labeled the Jun09 SPX 956 high as Primary wave I, and the July09 SPX869 low as Primary wave II. Then we dropped to the next lesser degree, Major waves, and labeled the Jan10 SPX 1150 high as Major wave 1, and the Feb10 SPX 1045 low as Major wave 2. Major wave 3 should be underway now with the current uptrend to new bull market highs. We will only know for sure if it is Major wave 3 after it concludes and the correction, the next downtrend, unfolds.
As for a potential upside target for Major wave 3 we offer the following. We have noticed this bull market, thus far, favors three month up cycles and one month down cycles. This placed our initial target for an uptrend high in May 10. Yet, this could extend into Aug10. These two dates are three months and six months respectively off the Feb10 low. Next, since Major wave 1 travelled 281 SPX points we can initially assume that Major wave 3 will have some fibonacci relationship to Major wave 1. The typical relationships are 0.618, 1.0 and 1.618. These three ratios would project a potential uptrend high at SPX 1219 (0.618), SPX 1326 (1.0) and wildly enough SPX 1500 (1.618). We'll consider SPX 1500 out of the realm of possibilities for now. This leaves us with SPX 1219 and SPX 1326. Another fibonacci relationship could be Major waves 1 thru 3 compared to Primary wave I. Since the 1.0 relationship was already hit at SPX 1156, then a 1.618 relationship at SPX 1333 is possible. There is not much else to go on this early in the bull market. The three fibo levels are then SPX 1219, SPX 1326 and SPX 1333. Since uptrends, and downtrends for that matter, usually run into resistance and support at the OEW pivots. They should offer some guidance as well. There are two pivots that most closely relate to these three fibonacci values. The first is at SPX 1222 and then next at SPX 1313. There are also several pivots in between. Yet after the 1313 pivot there is a wide margin to the next pivot at SPX 1363. Therefore it would make sense that the SPX 1326 and 1333 levels would be the upper limits of this uptrend, and the SPX 1219 the lower limit.
SHORT TERM
Support for the SPX remains at 1187 and then 1176, with resistance at 1222 and then 1240. Short term momentum ended friday at slightly overbought levels. We have been tracking this uptrend quite closely since the Feb 5th low at SPX 1045. We have been expecting it to unfold in five Intermediate waves. Thus far, after two months, we have not observed on our OEW charts any confirmation of this uptrend even completing the first Intermediate wave. The advance from SPX 1045 to friday's uptrend high at SPX 1195, 150 points, has been quite relentless. During this entire uptrend there have been seven noticeable pullbacks ranging from 12 to 26 points. Yet the largest pullback in percentage terms (2.3%) is smaller than every significant pullback during the previous two uptrends. Some would say the market is not allowing those out of the market an opportunity to enter. Technically this market has struggled lately somewhat with the congestion of the three pivots at 1168, 1176 and 1187. Also, as of friday's close there are negative RSI divergences on all charts up to the daily timeframe. This suggests the OEW pivot at 1176 has now become important support. Should the SPX break substantially below this level, for example to the 1168 pivot, then Intermediate wave two is likely underway. This would suggest an overall pullback between 3.5% and 5.5% is underway. This pullback should then find support between the OEW 1136 and 1146 pivot ranges. On the upside the SPX cleared the 1187 pivot on friday when it hit 1195. As long as 1178 holds we should now see a move to the 1222 pivot. Once the SPX clears 1200 and the DOW clears 11,000. Best to your trading!
FOREIGN MARKETS
The Asian markets were mixed this week but gained 0.9% overall. Hong Kong (+3.1%) was the leader and Japan (-0.7%) the lagger.
The European markets were nearly all higher this week and gained 0.8% overall. Spain (+3.0%) was the leader and Switzerland (0.0%) the lagger.
The Commodity equity markets were all higher this week and gained 0.7% overall. Russia (+1.4%) was the leader and Canada (+0.2%) the lagger.
All foreign indices remain in uptrends.
COMMODITIES
Bonds lost 0.1% on the week as the downtrend in prices, and uptrend in rates continues. The 10YR is yielding 3.89% while the 30YR is yielding 4.75%. Short term rates, while still very low, have been trending up as well lately.
Crude rose early but then backed off late in the week to gain 0.1%. Its uptrend continues to unfold.
Gold gained 3.1% on the week as it has now rose in price for seven days in a row. Silver continues to lead Gold in its uptrend.
The USD rose early in the week but gave most of it back on friday +0.3%. The EUR (-0.6%) and the JPY (+0.7%) remain in downtrends.
NEXT WEEK
Busy week ahead. On monday at 2:00 the Budget deficit will be reported. Then on tuesday there's the Trade deficit and Import price index. Wednesday we have the CPI, Retail sales, Business inventories and then the Beige book. On thursday we have the weekly Jobless claims, Empire index, Philly FED, Industrial production and the Home builders index. Then on friday, Options expiration day, Housing starts and Consumer sentiment will be reported. As for the FED. On tuesday a speech by FED governor Tarullo in Wash.,DC, then a speech by FED chairman Bernanke in the evening also in Wash., DC. On wednesday FED chairman Bernanke testifies before Congress on the economic outlook. Then on friday there is a panel discussion headed by FED governor Warsh in NYC. This should be enough to keep us busy. Best to you and yours this weekend and the week ahead.
CHARTS: http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1606987
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