The past week's volatility helps remind traders of the importance of pivot levels for understanding support and resistance. Now the depth of the pullback is raising the possibility of different Elliott Wave alternative counts. This weekend, it's something that Tony Caldaro is examining. The Objective Elliott Wave concepts of Tony Caldaro help measure out the market's movements, trend, and probabilities. 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 in this weekend's update:
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the Elliott Wave Lives On
by Tony Caldaro
May 8, 2010
weekend update
REVIEW
Monday, market gaps up at the open, trades as high as SPX 1205, and closes at 1202, 1.5% off the SPX 1220 high. Despite the rally we note in the update that five of thirteen foreign markets have already confirmed downtrends and four more are quite close.
Tuesday, continued weakness overseas leads to a gap down in the market to SPX 1193. The market then trades as low as SPX 1169 and closes at 1174. We note in the update nine of the thirteen foreign markets are now in confirmed downtrends and the US as well.
Wednesday, another gap down in the market to SPX 1167. The SPX trades as low as 1158 and closes at 1166. We note in the update the correction should last for several weeks with three potential support areas: the 1107, 1136 and 1146 pivots.
Thursday, market again gaps down to SPX 1162 at the open, then plunges in the afternoon to 1066, but recovers to close at 1128. To put this in perspective, the DOW closed on wednesday at 10,867 and hit a low of 9,870 on thursday - a record breaking 997 DOW point intraday decline in just one day. It recovered to close at 10,520. We note our surprise in the momentary drop below the 1107 pivot and even the 1090 pivot. Momentary, in that the market traded for less than ten minutes under the 1090 pivot and then recovered quite dramatically.
Friday, market again gaps down on the open to SPX 1125, trades as low at 1094, then recovers to close at 1111. In the update we note the continued volatility but narrowing range of the daily swings. We then aligned the DOW count with the NDX count suggesting the increased probability that Primary wave one just concluded at the uptrend high. Corrections most often determine waves during bull markets.
Economic reports for the week were nearly all positive. Personal income/spending/credit rose; ISM manufacturing/services remained in expansion mode; construction spending, factory orders and pending home sales remained positive; plus the ADP index, jobless claims and payrolls reported improvement. On the downside unemployment rose to 9.9% and monthly auto sales were lower. For the week the SPX/DOW had its biggest weekly decline since the Mar 09 low -6.1%, and the NDX/NAZ were -7.8%. Asian markets lost 5.9%, Europe dropped 8.6% and the Commodity equity group lost 8.2%. The volatility was felt across all markets. Bonds gained 1.5%, Crude lost 12.8%, Gold was +2.5% and the USD gained 3.4% as the EUR declined 4.1%.
Next week we expect volatility to continue. The VIX closed at 41 suggesting a 3% daily trading range. Economic reports will be focused around retail sales, the twin deficits and consumer sentiment, as well as, the volatility in the CDS, currency and equity markets.
LONG TERM: bull market
Despite this week's decline and volatility we remain unswayed in the OEW bull market scenario. As with every downtrend, whether bull market or bear, we do suggest caution and the hedging of long positions as one sees fit. In this modern age of computerized trading it is always advisable to be somewhat prepared for the unexpected. Even in bull markets selling panics can arise. We first observed this when program trading became the rage in the middle 1980's. One week in Sept 86 the market declined 7.4% during that bull market. Only to top out eleven months later and over 50% higher. Since then this type of rogue event has occurred in every bull market. In 1989 before the 1990 top, 1998 before the 2000 top and Feb 07 before the Oct 07 top. Volatility usually starts to increase as a bull market passes the mid-point of its ascent. This sets up for continued volatility during the next bear market.
Whenever the market plunges the permabears dust off their charts and we receive lots of emails about the bear market is resuming. Some suggest the "real dollar" bull market topped in 2000 and all this activity since then is just a continuation of an ongoing bear market. Others suggest the 2007 high was the end of some corrective wave, the 2009 low was a Primary wave one, and the recent high was the end of Primary wave two in a Primary five wave bear market. Nowadays, fear sells newsletters and financial services. The public, as we have noted, remains predominantly bearish. Let's briefly address each of these points.
First, the stock market trades in "nominal dollars". They are certainly worth less than they were in 2000, but nevertheless, we live in a world of nominal dollars. After the 2000 top the bear market unfolded in a triple zigzag into the Oct 02 low. No five waves down there.
Second, the stock market then rallied, in a five wave sequence, to all time new highs in Oct 07. It was not a corrective bear market rally. We tracked most of those waves, day by day starting in 2005, right on this blog.
Third, from Oct 07 to Mar 09 the market declined in a detailed zigzag. Again, we tracked all those waves, day by day, right on this blog. We identified the zigzag low and then projected a 50% retracement rally. It was not five waves down, it was three waves down. Bear markets do not unfold in five waves, only three. Bear markets, afterall, are corrections to previous bull markets of similar degree. Since corrections are three waves no bear market can ever be five waves. Unless, of course, they closed the stock market on monday and everything went to zero. Since this would represent a straight line down from SPX 1220 to zero it would be considered a five wave event. But we would still have to count from the all time high of SPX 1576, and it would still be a three wave bear market to zero.
Fourth, the advance from the Mar 09 low in most markets worldwide has been five waves. Five waves up, during long term uptrends, can only occur in bull markets. Bear market corrections do not occur in five waves, unless they occur within a long term downtrend.
Fifth, naturally anyone using subjective EW analysis can place labels anywhere they choose on a chart to fit their outlook. We can not. OEW defines the waves as the market defines them. We can only label then what has actually occurred, not what we want to occur. This does not preclude us from making errors now and then about the overall direction of the market. We are naturally trying to anticipate, based upon the actual waves, what the market is going to do before it does it. Anticipate, monitor, adjust. Once the long term trend is confirmed it's then only a matter of tracking the waves, as they unfold, within the long term trend.
In conclusion, 2000 ended Primary wave III, 2002 ended Primary wave IV and 2007 ended Primary wave V of the 1974-2007 Cycle wave [5] bull market. The bear market that unfolded between 2007 and 2009 took the form of a zigzag and ended in Mar 09. Since then we have witnessed five waves up from those lows in a new bull market. I have posted this today as a reference for the current and anticipated future emails receive(d).
MEDIUM TERM: downtrend hits SPX 1066.
For some time now we have been maintaining three bullish counts. One on the SPX/DOW, one on the NDX and another on the NAZ. At the end of this week we shifted the DOW count to match the NDX count as it appeared to increase in probability. We'll explain below the three counts as a review. This information was posted often in Jan/Feb of this year.
The SPX count suggests the five waves up thus far should be labeled as follows: Primary waves I - II, Major waves 1 - 2 and Intermediate waves i - ii. The reason we took this count is that we did not see much alternation between the two corrections: Jun09-July09 and Jan10-Feb10. Therefore, we assumed a subdividing sequence of waves. Nothing has occurred yet to invalidate this count.
The DOW/NDX count suggests the five waves up thus far should be labeled as five Major waves 1-2-3-4-5 completing Primary wave I and Primary wave II is underway now. When comparing the first two corrections of 9.1% to this correction of 12.6% at thursday's low this scenario has increased in probability. In addition, many of the foreign markets, especially Europe and the Commodity equity group, are also displaying a Primary I - II count. As the US market provides additional price data we'll know which one of the two counts in the actual count. Anticipate, monitor, adjust.
The NAZ count suggests something quite different. This is the rogue bull market count. Between 1937-1942 a five wave bull market began. The long term trend was up and fives waves up completed in 1938. The market then went into a steep correction. When the correction was over the market tried to resume the bull market, but, the advance was corrective and not impulsive. By 1939 the market retested the 1938 highs and then began to go sideways for seven months. In hindsight of course, this occured before most of our births, this should have been a technical warning. Historically, Germany invaded Poland right at the secondary 1939 high. Then when they invaded France the US stock market collapsed. This is the only bonafide five wave OEW bull market that failed and reverted into a bear market until 1942. In EW terms the count was a 5-3-3, and inverted reversed flat. Have not observed this type of pattern before this period, nor since this event. To be totally objective, which is the goal of OEW, we have included this count as one of the three. However, since it was a one time rogue event we have given it the lowest probability of the three.
SHORT TERM
Support for the SPX remains at 1107 and then 1090, with resistance at 1136 and then 1146. Short term momentum obviously hit extremely oversold levels on thursday and are still oversold. During the early part of the week we projected three retacement levels based upon the recent Feb10-Apr10 uptrend. They were the customary fibonacci 38.2%, 50.0%, and 61.8% levels. This suggested support at the 1146, 1136 and then 1107 pivots. On thursday the market plunged through these three pivots, the one below at 1090, and nearly hit the next one at 1058. The price low was SPX 1066. This was certainly much more than expected for a retracement of the recent uptrend. The market actually acted like it was starting to retrace a percentage of the entire five wave bull market. This would fit with the Primary wave I - II scenario. The close for this week was statistically significantly important. If the market had closed near the lows we could have expected a follow through next week to lower lows. However it closed closer to mid-range. This suggests either the low is in, or several weeks of volatile consolidation before the low is made.
For now, we will continue to look for an end to this correction this month into the first week of June with the Intermediate wave i - ii scenario. In case this this scenario fails and the Primary wave I - II scenario takes over we should review that potential now. The first obvious support is at the previous 4th wave of one lesser degree, Major wave 4. This is the low of the Jan10-Feb10 correction at SPX 1045. Next, since bull market corrections are almost always limited to 20% or less we should focus on three fibonacci retracement levels: 23.6% (SPX 1089), 38.2% (SPX 1009) and 50.0% (SPX 944), of the entire five waves. Interestingly enough we have OEW pivots almost precisely at these levels: 1090, 1007 and 944. Since the correction has already hit SPX 1066 the 23.6% retracement has already been exceeded. This would suggest a potential Primary wave two II between the previous 4th wave, Major wave 4, at the OEW 1041 pivot and the 1007 pivot. Lots to think about, but most of the damage under either wave count has likely already occurred.
Before we leave this topic we like to make note of the following. Typically during bull market corrections the weekly RSI gets oversold, the market bottoms, and a new uptrend begins. You can review this phenomenon on the weekly SPX chart using the link below. On friday the weekly RSI hit oversold. Even though downside momentum may continue a bit lower the risk/reward ratio for investors is much better now that it was just a week ago. The long term trend is up and the market is oversold on a medium term basis. Personally, I have already begun preparing a shopping list using the charts posted in the link below. Best to your trading!
FOREIGN MARKETS
The Asian markets were all lower on the week losing 5.9%. All five indices we follow are in confirmed downtrends.
The European markets were all lower on the week losing 8.6%. All five indices we follow are in confirmed downtrends as well.
The Commodity equity markets were also all lower on the week losing 8.2%. All three indices we follow are in confirmed downtrends.
This correction in the US market started in the foreign markets and took hold when the fifth foreign index, Australia's ASX, confirmed a downtrend.
COMMODITY MARKETS
Bonds rallied 1.5% on the week as the preceived safe haven is still the USD and US debt. Bond prices are uptrending in this choppy market.
Crude tumbled 12.8% on the week. Our long term count is under fire in this market but still holding and this market is oversold.
Gold rallied 2.5% despite Silver's sharp decline earlier in the week. It's rare when Gold is in a confirmed uptrend while Silver is on a confirmed downtrend.
The USD soared 3.4% on the week making new uptrend highs. An uptrend that has lasted an amazing seven months. What was junk paper in 2009 is now the safe haven from the junk paper of 2010 the Euro. Wondering if the Yen will be the new junk paper in 2011.
NEXT WEEK
Today, saturday, FED chairman Bernanke gave a speech at the Univ of SC on the economics of happiness: http://www.federalreserve.gov/newsevents/speech/bernanke20100508a.htm. The economic week kicks off on tuesday with Wholesale inventories. On wednesday the twin deficits Trade/Budget will be reported, and then on thursday weekly Jobless claims and Import prices. On friday we have Retail sales, Industrial production, Consumer sentiment and Business inventories. As for the FED. The only thing currently scheduled is a panel discussion with vice chairman Kohn in Canada on thursday. It has been an eventful week. Rest and recharge. Who knows what wonders we'll experience next week. All the best to you and yours!
CHARTS: http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1606987
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