The big question for investors is whether the stock market is basically still bullish, or turning bearish? Tony Caldaro with his Objective Elliott Wave reminds us that pullbacks in bull markets can be sickeningly vicious but still not cause a downtrend. 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 15, 2010
weekend update
REVIEW
Another volatile week concluding with another end of week sell off. This one, however, ended with a positive result. For the week the SPX/DOW were +2.25%, and the NDX/NAZ were +3.35%. Asian markets gained 1.3%, Europe was +4.1%, and the Commodity equity group was +3.0%. Economic reports had only two negatives for the week: the trade/budget deficits expanded again. On the positive side: retail sales continue to grow, wholesale/business inventories expanded along with industrial production, jobless claims moderately improved, and consumer sentiment plus import prices rose. The LEI remains in the expanding economy mode at 62.2%, and public sentiment remains bearish at 38.3%. This week's economic reports will revolve around the CPI/PPI, housing and the FOMC minutes.
LONG TERM: bull market
Every bull market, and bear market for that matter, have their own characteristics. The Oct 07-Mar 09 bear market started off by creating waves every month until it had completed five waves down into the Mar 08 low at SPX 1257. Then a shift occurred when it had a two month rally into the May 08 high at SPX 1440. After that the downtrends took 2-3 months and the uptrends remained at 1-2 months until another five waves were completed at the SPX 667 low. At the conclusion of that 17 month bear market the SPX had lost 58% of its value and completed a 5-3-5 zigzag. The 58% market decline was the largest since the 1929-1932 bear market.
The current bull market has created its own set of characteristics. The first uptrend took three months followed by a one month correction. The second uptrend took six months, with a 6.5% pullback at the three month point, followed by a one month correction. The recent third uptrend took nearly three months, and so far we are still in the first month of its correction. While the countertrend rallies were 1-2 months during the bear market, the countertrend corrections have been just one month during this bull market. Until this pattern shifts we have been expecting the correction to end some time this month. In fact, it might have already occurred.
We are maintaining two bullish counts for this bull market. A basic five waves up (DOW/NDX) from the Mar 09 low to the Apr 10 high to conclude Primary wave I, and Primary wave II is underway now. A more complex subdividing wave structure (SPX) from the Mar 09 low to the Apr 10 high with Intermediate wave two underway now. In the weeks ahead one of these two count will likely be eliminated.
MEDIUM TERM: downtrend may have bottomed
The recent uptrend topped on April 26th at SPX 1220. While the uptrend was topping the market started to get a lot more volatile than it had been for the previous six weeks. This often occurs nearing uptrend tops. The day after the high the SPX dropped to 1182. This was the largest pullback since the uptrend began on Feb 5th at SPX 1045. This was our signal that the nearly three month uptrend may have concluded. The market recovered during the next few days but dropped on that friday to SPX 1186. Early the following week OEW generated a downtrend confirmation. On thursday May 6th the market went into a momentary freefall and the SPX hit 1066 before recovering to close at 1128. Since then the SPX has rallied to 1174 on this thursday before pulling back to 1126 on friday. As a result of all this volatility the VIX shot up to its highest level since the Mar 09 bear market low. This may indicate that this market is in the (DOW/NDX) Primary wave II. When we review the percentage of decline for the three downtrends. We find the SPX declined 9.1%, (intraday high to low), in both of the first two corrections. During this correction, however, the SPX has already declined 12.6%. This could be additional evidence that a Primary wave II is underway.
When we review the RSI on the hourly/daily/weekly charts we see the potential for a low already being in place. Typically during bull markets, downtrends are accompanied with a weekly oversold condition. That was hit during the panic selling of May 6th. The daily RSI usually gets extremely oversold. It did this for the first time since the Feb 10 correction low during that week. Then after the low is in place the market rallies strongly, gets overbought in the hourly RSI for wave 1, and then gets extremely oversold for wave 2 of the next uptrend. This has recently occurred.
When we combine all of this technical data together we have a potential downtrend low at SPX 1066, a Minor wave 1 to SPX 1174, and a potential Minor wave 2 low at SPX 1026. The 12.6% intraday decline during this downtrend, and the spike up in the VIX, suggests this is a Primary wave II correction. With this in mind we can set some parameters for the week ahead.
After a rally from SPX 1066 to 1174 (108 points) a 50% pullback equals SPX 1120, and a 61.8% pullback SPX 1107. The low thus far is SPX 1126. The key area to watch on the downside is the OEW 1107 pivot. If the market has additional downside pressure this pivot needs to hold to support the Minor wave 1 - 2 scenario. If SPX 1100 is broken on the downside a retest of the SPX 1066 low, or lower, is possible. On the upside the SPX needs to clear the OEW 1146 pivot to turn the OEW short term charts positive again. This would suggest that Minor wave 3 is underway. The market closed at the 1136 pivot on friday.
One last point which is fundamental and not technical. The LEI (leading economic indicator) readings we post every week continue to suggest the economy is expanding. Anything above 50% is positive (expanding) and under 50% negative (contracting). The current LEI reading is 62.2%. Historically, our data covers over 50 years, bull markets do not run into real trouble until the LEI drops to the 50% level. When that occurs the bull market usually corrects and then awaits further data. If the economy starts to contract, LEI drops below 50%, a bear market usually follows. If the LEI turns higher again the bull market resumes. With the current LEI reading solidly in the expanding mode the likelihood of a bear market, at this point, has a very low probability.
SHORT TERM
Support for the SPX is at 1136 and then 1107, with resistance at 1146 and then 1168. Short term momentum was extremely oversold on friday when the SPX hit 1126 and then edged higher. Fibonacci retracements of the recent rally suggest support at SPX 1120 (50.0%) and then 1107 (61.8%). We have counted the rally from SPX 1066 to 1174 as Minor wave 1, it looks impulsive, and the current pullback as Minor wave 2 of a potential new uptrend. This weeks parameters have already been covered above. Best to your trading!
FOREIGN MARKETS
The Asian markets were all positive on the week gaining 1.3%. Australia's ASX (+3.0%) led and China's SSEC (+0.3%) lagged.
The European markets were all positive on the week gaining 4.1%. Germany's DAX (+6.0%) led and England's FTSE (+2.7%) lagged.
The Commodity equity group were all positive on the week gaining 3.0%. Russia's RTSI (+5.2%) led and Brazil's BVSP (+1.0%) lagged.
COMMODITIES
Bonds (+0.1%) continue to benefit from the turmoil in Europe. All rates across the board are in downtrends.
Crude (-2.0%) remains in a downtrend but is now oversold on the weekly chart with a potential positive divergence on the daily.
Gold (+2.0%) made all time new highs this week at $1,249, uptrend continues.
The USD (+1.9%) has been in an extraordinary seven month uptrend hitting 86.24 this week. The equally downtrending EUR (-3.1%) dropped to 123.57.
NEXT WEEK
Monday kicks off the economic week with the Empire index at 8:30 and the Home builders index at 1:00. On tuesday we have the PPI and Housing starts at 8:30. On wednesday we have the CPI, and then on thursday the weekly Jobless claims, the Philly FED and Leading indicators. The FOMC minutes will be released at 2:00 on wednesday. Best to you and yours!
CHARTS: http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1606987
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