the Elliott Wave Lives On
by Tony Caldaro
June 5, 2010
On the surface this week's closing numbers do not look much different than previous closing numbers during this correction. The SPX/DOW were -2.15%, and the NDX/NAZ were -1.40%. Asian markets lost 0.2%, Europe slid 1.2%, and the Commodity equity group lost 1.0%. Bonds gained +0.7% on equity market weakness, Crude lost 3.9% on USD strength, Gold was indecisively +0.4%, and the USD surged 1.8% to new seven month uptrend highs. Economic reports were mixed. Construction spending and auto sales were higher. The weekly jobless claims and the unemployment rate dropped. ISM manufacturing/services remained expanding but at a slower pace. The Payrolls report added jobs but at a disappointing rate, as did the ADP employment index. And, factory orders were positive but lower. Next week will be highlighted by retail sales and the trade deficit.
LONG TERM: bull market but cautious
Overall we continue to count this bull market as five Major waves from the Mar09 SPX 667 bear market low. Major wave 1 SPX 956 Jun09, Major wave 2 SPX 869 July 09, Major wave 3 SPX 1150 Jan 10, Major wave 4 SPX 1045 Feb10, and Major wave 5/Primary wave I SPX 1220 Apr10. The two corrections during the five wave advance were both less than 10%, and this correction has already exceeded that 10% threshold. This fits quite nicely with the wave pattern. We had noted several support levels during the recent second decline. First the OEW 1058 pivot near the 1066 'flash' low. Second and current low, the OEW 1041 pivot at Major wave 4. The next three supports were all fibonacci retracements levels: OEW 1007 pivot 38.2%, OEW 944 pivot 50.0%, and OEW 876 pivot 61.8%. The first two of these retracement levels we see as quite normal after a 13 month 83% advance in the market. The 61.8% retracement level is a bit extreme and could suggest a 1937-1942 bear market style scenario. We are carrying this potential count on the NAZ charts. Since it does look like we are also experiencing a 4 year cycle low during this correction. We have temporarily set our sights on the 50% retracement level at the OEW 944 pivot. We are, however, looking for certain technical conditions to be met where ever the market actually bottoms. One that is easy to follow is an oversold monthly RSI.
Three items of note showed up on our radar screen friday. First the monthly payroll reports continue to be quite disappointing twelve months into a recovery. Second, our weekly Leading Economic Indicator (LEI) has been dropping at an alarming rate. Three weeks ago it was at a very comfortable 62.2%, and this week it hit an uncomfortable 50.4%. Third, we noticed something quite amazing when reviewing the charts. While the daily up/down volume has been swinging quite often between 90% up days and 90% down days, the weekly up/down volume has received little attention. This week it went off the charts, chart below. Not sure what to make of this record event: 119 to 1 downside volume. Not even during the 2000-2002 and 2007-2009 bear market declines did anything like this occur. When unusual events occur, or unexpected reports leading to a level of uncertainty, it's time to get very cautious with the markets.
MEDIUM TERM: downtrend low at SPX 1041
The bull market of March 2009 has run into quite a bit of turbulence since the expected April uptrend high at SPX 1220. Within ten days of the April 26th high a 'flash' low was created at SPX 1066. That day the SPX dropped 100 points and immediately retraced over 70% of the decline before the day ended. Within another three trading days the entire decline for that day was fully retraced. In a normal correction that 'flash' low could have been the low. The decline from SPX 1220 to 1066 (12.6%), however, took the market beyond the boundaries of what is considered normal these days for a correction: 10%. With the downside potential for the correction open ended, more aggressive sellers entered the fray. After a post 'flash' recovery rally to SPX 1174 on May 13th, the market headed south to establish a lower low at SPX 1041 on May 25th. After that low was in place the market rallied to SPX 1103 this past thursday and sold off hard on friday to close at 1065. The total decline, thus far, into the SPX 1041 low has been 14.7%.
We continue to count this downtrend as three Major waves: Major wave A SPX 1066, Major wave B SPX 1174, and Major wave C underway. When completed this should end Primary wave II. Since Major wave A declined 154 points (1220-1066), and Major wave B rallied to SPX 1174. Then Major wave C will equal Major wave A at SPX 1020, and will be 1.618 times Major A at SPX 924. When we align these two levels with OEW pivots we arrive at the 1018 and 924 pivots. These pivots then give us potential ranges for the overall Primary wave II correction: a 38.2% retracement between the 1007 and 1018 pivots, and a 50.0% retracement between the 924 and 944 pivots. So we have some sort of alignment between the internal structure of the correction and the fibonacci retracement levels of Primary wave I.
Support for the SPX is at 1058 and then 1041, with resistance at 1090 and then 1107. Short term momentum was overbought on thursday and ended extremely oversold on friday. Since the market closed close to the lows on friday, after a large drop, we should see some follow through on monday. After that the market should rally somewhat to work off the oversold condition. Thursday's rally was sufficient to label the double test of the 1107 pivot as Intermediate wave B of Major wave C. Friday's break lower helped to confirm that count. If this Intermediate wave C is similar to the previous Intermediate wave C they market could enter a short term trading range before heading down to its final low. Under this scenario we would expect the trading range to occur between the 1058 and 1090 pivot. However, in volatile markets you just need to take one day at a time. Best to your trading!
Asian markets lost 0.2% on the week. India's BSE (+1.5%) performed best, and China's SSEC (-3.9%) lagged.
European markets lost 1.2% on the week. Germany's DAX (-0.1%) performed best, and the STOX index (-2.3%) lagged.
The commodity equity group lost 1.0% on the week. Brazil's BVSP (-0.7%) performed best, and Russia's RTSI (-1.5%) lagged.
Bonds gained 0.7% on the week as rates continue to downtrend. This market continues to find a "safe haven" reason to continue at these levels.
Crude lost 3.9% on the week as it continues to downtrend. Still expecting to see $65 before this correction ends.
Gold gained 0.4% in a choppy week. Uptrend continues and expecting new highs shortly.
The USD (+1.8%) extended its "safe haven" uptrend to seven months this week. While our Euro (-2.5%) 121-122 range provided support for a couple of weeks it gave way on friday with the Euro trading down to 119.57. Current trends remain in force.
On monday at 3:00 Consumer credit will be reported. Then we will have to wait until thursday for the next economic reports. On thursday, weekly Jobless claims and the Trade deficit. Then on friday, Retail sales, Consumer sentiment and Business inventories. A busy week for the FED. On tuesday FED governor Duke gives a speech in Florida. On wednesday FED chairman Bernanke gives Congressional testimony in the morning, and then a speech in Virginia in the afternoon. Also on wednesday the Beige book will be released in between appearances at 2:00. Then on thursday the FED's Flow of funds report. Should be an interesting week. Best to yours!