Tuesday, June 15, 2010

Cautious is the best approach for investors until the markets prove their worth: Tony Caldaro's OEW weekend update

As we know... above SPX 1090 is bullish. I'm posting below Tony Caldaro's analysis from the past weekend (thanks again Tony!), and you can always follow his daily updates (see lists at right). As I stated the last two weekends: The big question for investors is whether the stock market is basically still bullish, or turning bearish? Tony Caldaro with his Objective Elliott Wave discusses his wave count fine-tuning, and reminds us that pullbacks in bull markets can be sickeningly vicious but still not cause a downtrend. Recent volatility helps remind traders of the importance of pivot levels for understanding support and resistance. 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:

the Elliott Wave Lives On
by Tony Caldaro
June 13, 2010

weekend update

After retesting the downtrend low on tuesday the markets had a generally good week. Economic reports were steady to positive with only retail sales turning negative. Consumer credit remained positive, as did wholesale/business inventories. Consumer sentiment improved along with the budget deficit, while the trade deficit and weekly unmployment claims remained steady. The stock market responded to the reports but had a positive bias on thursday and friday. For the week the SPX/DOW were +2.65%, and the NDX/NAZ were +0.90%. Asian markets were mixed -0.1%, European stocks gained 2.9%, and the Commodity equity group gained 1.3%. Bonds were -0.1%, Crude gained 3.7%, Gold added 0.5%, and the USD lost 1.0%. This week will be focused on the PPI/CPI, Housing, and Options expiration.
LONG TERM: bull market but cautious
We continue to count an OEW bull market from the SPX 667 Mar09 low. The market displays five waves up from this low which we have counted as a completed Primary wave I. The five waves are labeled as follows: Major wave 1 SPX 956 Jun09, Major wave 2 SPX 869 July09, Major wave 3 SPX 1150 Jan 10, Major wave 4 SPX 1045, and Major wave 5 SPX 1220 Apr10. After the Apr SPX 1220 high the market entered a Primary wave II correction. This correction started off quite steep, with a drop from SPX 1220 to 1066, (12.6%), within the second week. After that a countertrend rally to SPX 1174 followed in the third week. Then a more gradual decline, testing the Major wave 4 low, a rally, and then a retest of that low just this week. During this seven week period we've witnessed a debt crisis in Europe, accompanied by a plunging Euro and rising USD, an oil crisis in the Gulf, and a LEI dropping 3% to 4% per week into negative territory. All of these events together suggest a softening or weakening economy heading into the second half of 2010. Of these four economic events we can only quantify the potential effects of one on the stock market - the LEI.
When reviewing the 40+ years of LEI data we observe ten prior instances when the LEI dropped from well above 50% to 47% or lower. All of these events signalled further trouble ahead for the equity markets. The minimum market response was a 20%+ correction lasting for several months, the maximum - a recession and bear market. Since the long term wave structure displays a bullish five waves up from the Mar09 low, we're opting for the minimal 20%+ market damage at this point in time. This fits with the 4-year cycle low we are expecting this year, and the support levels we posted at the beginning of this correction.
To review, there were five levels: 1. OEW 1058 pivot - the 'flash' low; 2. OEW 1041 pivot - Major wave 4 low; 3. OEW pivot 1007 - 38% bull market retracement; OEW pivot 944 - 50% bull market retracement; and OEW 876 - 61.8% bull market retracement. The first, (1058), was exceeded when the OEW 1041 pivot was hit and retested recently. The second level, (1041), has definitely provided support for several weeks, but only represents a 14.7% correction. The third level, (1007), gets close with a 17.5% correction. Yet, it is not until the fourth level is hit, OEW 944 pivot - 50% retracement, that the correction exceeds 20% at 22.6%. This fits, and has been our general target in recent weeks.
Another factor to consider is the timing of the Primary wave II low. Initially we had been expecting the 4-year cycle to bottom in June/July, with July the most likely month. Now, based upon recent LEI data, we may have to experience a more complex correction for Primary wave II. One lasting for several months instead of a just a few. This opens the timing window to a possible Oct 2010 low, the most common month for a 4-year cycle low. While this correction unfolds we think it best to remain cautious on the equity markets except for trading.
MEDIUM TERM: downtrend low at SPX 1041
The downtrend that started in April at SPX 1220 has unfolded in three larger waves thus far. The first was a zigzag from SPX 1220 to the 'flash' SPX 1066 low. After a very solid countertrend rally to SPX 1174, the third larger wave unfolded. Currently it appears to have taken the form of an extended flat with a double bottom at the OEW 1041 pivot. Should the SPX break through the 1107 pivot, the recent short term highs were 1104 and 1106, it would suggest this wave structure may be complete. If not, and the SPX breaks down through the 1041 pivot, then the decline from SPX 1106 is still underway.
In either case, and to remain as objective as possible considering the new quantified data. We can no longer be certain that these three larger waves are all of the Primary wave II correction. Therefore, we are downgrading the wave count one degree from the three Major waves of Primary wave II to the three Intermediate waves of Major wave A. This is quite an adjustment. However, the LEI data is economic data and it suggests trouble ahead for the economy. This adjusted count will be displayed on the SPX charts, and we will maintain the current count on the DOW charts.
Support for the SPX has moved back up to 1090 and then 1058, with resistance at 1107 and then 1136. Short term momentum ended the week overbought as the market closed at its high for the week. Again, we have a zigzag (SPX 1220-1066), a counter rally to 1174, and then what appears to be a flat (SPX 1174-1041). At the SPX 1041 low the market was oversold on every timeframe up to an including the weekly charts. Plus there were positive divergences from the daily timeframe on down. Should the OEW 1107 pivot be broken this market should continue its rally. If it fails to accomplish this and breaks below the 1041 pivot this larger three wave pattern is extending. Either way this appears to be traders market with twists and turns often occurring overnight. Best to your trading!

Asian markets were mixed and lost 0.1% on the week. Australia's ASX (+1.0%) led and Japan's Nikkei (-2.0%) lagged.
European markets were all higher and gained 2.9% on the week. Spain's IBEX (+7.2%) led and England's FTSE (+0.7%) lagged.
Commodity equity markets were mixed for a 1.3% overall gain. Brazil's BVSP (+3.4%) led and Russia's RTSI (-0.3%) lagged.
All foreign and domestic indices remain in downtrends.

Bonds ended relatively flat on the week -0.1%. The 10YR is again flirting with the 3% level after hitting 4% just two months ago. Bonds remain in an uptrend.
Crude rallied 3.7% this week with the weakness in the USD. It has had a nice bounce off the May $67 low, but still in a downtrend.
Gold gained 0.5% on this week. It made an all time new high at $1,252 this week as the uptrend continues.
The USD lost 1.0% on the week as many EUR bulls made their public appearance. We do have negative divergences at the 88.71 DXY high. However, we have seen these divergences and 1% down weeks before during this extended seven month uptrend.

Relatively busy week ahead. On tuesday the Empire index, Import prices and the Home builders index will be reported. On wednesday we PPI, Industrial production and Housing starts. Then on thursday, the weekly Jobless claims, CPI, Current account deficit, Leading indicators and the Philly FED. Friday is Options expiration day. As for the FED, chairman Bernanke gives a speech on wednesday evening in NYC. Best to your weekend and week!

CHARTS: http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1606987

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