Sunday, July 11, 2010

Bull run possible? Tony Caldaro's Objective Elliott Wave update reviews the possibilities

The stock market has raised hopes that the bull may return - here's some info on that possibility. My dear readers, I've become more busy than ever with a move of residence occurring through end July. But we can still chart the markets! - and continue to benefit from those who allow us to share their analytical insights, such as Tony Caldaro. Tony Caldaro with his Objective Elliott Wave discusses his views including levels to watch for either resistance turns or breakthroughs. 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
July 10, 2010

weekend update


The market traded higher on technicals alone this week as economic reports were sparse. ISM services remained positive but contracted and consumer credit continued to contract. On the positive side weekly jobless claims were lower and wholesale inventories rose. Equity markets, worldwide, had a good week. The SPX/DOW were +5.4%, and the NDX/NAZ were +5.0%. Asian markets rose 3.0%, European markets rose 5.9%, and the Commodity equity group rose 3.4%. Bonds lost 0.3%, Crude was +5.7%, Gold was flat, and the USD lost 0.6%. Overall it was a good reversal week after the previous week's decline. Next week is highlighted by monday's forum at the FRB, wednesday's FOMC minutes, a slew of economic data throughout the week, and of course Options expiration week.
LONG TERM: bull market
We continue to believe this is a bull market for the three reasons detailed in friday's special report. Certainly we have received our share of bearish wave counts and negative fundamental data that has passed through our email box during the past few months. While we appreciate the input, we aim to remain as objective as possible and let the market dictate its own wave count as interpreted by OEW. The market creates the waves, OEW quantifies them, and we label them. While this is occurring, we are also observing lots of technical indicators and some economic indicators that have also proven to be quantifiable. These indicators, at times, either support the wave count or question its validity.
The market remains in a long term uptrend. The wave count from the Mar09 SPX 667 low remains the same: Major wave one Jun09 SPX 956, Major two July09 SPX 869, Major three Jan10 SPX 1150, Major 4 Feb10 SPX 1045, and Major 5 Apr10 SPX 1220. This is a clear five waves up from the Mar09 SPX 667 low into the Apr10 SPX 1220 high. The count can be observed on the SPX/DOW charts in the chart link below. When Major wave five completed, it also completed Primary wave I of our five Primary wave bull market. From that April high the market entered its biggest correction since the 2007-2009 bear market. While both Major wave two and four were only 9.1% corrections, Primary wave II has corrected 17.1% at the recent SPX 1011 low. Near the beginning of this correction, which also coincides with the presidential four year cycle, we projected five levels of support as the market corrected:
1. OEW pivot 1058 ... the early May flash low
2. OEW pivot 1041 ... the low of Major wave 4
3. OEW pivot 1007 ... a 38.2% retracement of Primary wave I
4. OEW pivot 944 ... a 50.0% retracement of Primary I
5. OEW pivot 876 ... a 61.8% retracement of Primary I
When the correction resumed its decline in mid-May the first level was tested but did not hold. The second level, OEW 1041, was tested, held, and then retested by early June. After that we had an 89 point rally in the SPX, or a 50% retracement of the entire correction up to that point. We labeled this low Major wave A and the rally high Major wave B of the ABC Primary wave II correction. By the end of June the market broke through the OEW 1041 pivot and found support at the third level: the 1007 pivot and 38.2% retracement. At a minimum, this decline presented the possibility of a completed ABC wave pattern for Primary wave II. We have been anticipating, since May however, that Primary wave II was coinciding with the four year cycle low. These cycle lows can, at times, be quite severe even in bull markets, i.e. 1990 and 1998. Typically they bottom in July or October with a worse case 20+% decline. With this in mind we continued to monitor the worse case scenario.
After the July 1st SPX 1011 low a week ago the market did something this past week it had not done since July09. Rally strongly on a week to week basis. We posted in friday's update that there were only nine times the SPX and DOW both rallied over 3% in one week since the bull market began. And, they all occurred either at the beginning or during uptrends. You can review that post for the details. To put the asterisk on that observation the SPX/DOW finished the week with more than a 5% gain. This has only occurred three times since the bull market began:
1. the week of Mar 9, 2009 ... the kickoff to the bull market and Major wave 1
2. the week of Mar 23,2009 ... the continuation of Major wave 1
3. the week of July 13, 2009 ... the kickoff of Major wave 3     

This week's strong rally suggests it was a kickoff to Major wave 1 of Primary wave III. The correction, not yet confirmed, may have ended on July 1st at SPX 1011.
MEDIUM TERM: downtrend low at SPX 1011
As the Primary wave II downtrend unfolded we labeled the waves as a series of abc's. At no time did the correction look like an impulse wave to the downside. We labeled the correction as three Major waves with subdivisions within Major wave A and B. Major wave A declined in a detailed double three (zigzag-flat) from the Primary wave I high at SPX 1220 into the early June low at SPX 1042. Major wave B retraced 50% of the entire decline, in a simple abc, and topped in mid-June at SPX 1131. After that Major wave C declined into the recent early July low at SPX 1011. On tuesday the market action was quite peculiar: gapping up, retracing the gap, and then closing higher. We noticed the DOW had made a lower low on July 2nd, while SPX/NDX/NAZ did not. We then tentatively labeled the DOW low as Intermediate wave A of Major wave C. On wednesday the market moved higher turning the OEW short term charts positive for the first time in a couple of weeks. We then labeled the SPX 1011 low as the end to Int. wave A as well. However, we upgraded the DOW count to a possible Primary wave II completion at its July 2nd low. Thursday the market continued its rally and then friday moved even higher after that. On friday we upgraded the SPX/DOW counts to a potential Primary wave II completion based upon the technical indicator noted above and the following observations.
Typically during bull market corrections we get oversold conditions in all timeframes up to the weekly charts. After really steep or complex corrections there is usually a positive RSI divergence at the new lows and the MACD gets quite oversold. Also there is positive RSI/MACD divergences or an extremely oversold condition on the daily charts. All of these conditions have been met at the recent low. While we did expect the monthly RSI to drop to 30, if we corrected down to SPX 944, it did reach its most oversold condition of the entire bull market. In addition, the NYAD market breadth typically gets oversold during corrections as well. It appears to have put in a double bottom after two extremely oversold declines. Also at the lows only 31% of all the stocks on the NYSE were above their 200 DMA. Again the most oversold condition since the bull market began. The VIX has failed to confirm any part of the decline after the initial test of the OEW 1041 pivot and is now downtrending. In bear markets it would have continued to move higher as volatility surged. One last point. The market had turned so bearish that only 3 of the 30 DOW were trading above their 200 DMA. This usually occurs in bear market, not bull market corrections. We use some other technical indicators as well, but you get the general idea. It appears Primary II is over and Primary wave III has just kicked off.
Support for the SPX remains at 1058 and then 1041, with resistance at 1090 and then 1107. Short term momentum remains overbought. The rally from the SPX 1011 low started off a bit choppy but has since started impulsing. The surge this week across many of the worlds indices, and especially the US, is typical of a kickoff rally to a new uptrend. The economy, however, is weakening and there are many, many problems yet to be addressed. Bull markets have a been known to climb a wall of worry. But they also need catalysts to keep the upside momentum going from time to time. This bull market will certainly be no exception.
Keeping this in mind we need to remain objective going forward. The important pivot on the downside appears to be 1018. It had a double test at the beginning of this month and held both times after the rally off the 1007 pivot.  The key pivot then becomes the 1032 pivot. This should not be broken to the downside if we are truly starting a new uptrend. On the way up the first resistance is the 1090 swing pivot. It has remained the positive/negative bias pivot throughout the correction. The market needs to clear this pivot next week and the 1107 pivot shortly thereafter. Then we should get an OEW uptrend confirmation and Major wave 1 of Primary wave III would be underway. Also keep in mind this rally/uptrend needs to be impulsive, and not a choppy rally. One last point. We can not totally rule out the the recent low was the end of Major wave A, this is Major wave B, and Major wave C will then bottom in October. If this rally/uptrend is impulsing that probability continually decreases over time. Best to your trading!
Asian markets were all higher this week +3.0%. India's BSE and Hong Kong's HSI remain in confirmed uptrends and are leading. They both bottomed in May.
European markets were all higher this week+5.9%. Spain's IBEX is in a confirmed uptrend and it was up 9.0% just this week.
The Commodity equity group were all higher as well +3.4%. Brazil's BVSP has an interesting recent wave pattern along with the DAX and the RTSI.
Bonds were -0.3% on the week but remain in an uptrend. Long term rates closed at 3.06% after hitting 2.89% last week.
Crude gained 5.7% on the week. It's still uptrending from its May low after getting quite oversold recently.
Gold was flat on the week. It traded as low as $1185 before rallying the past two days. Still downtrending.
The USD dropped 0.6% on the week as its downtrend continues. The CHF has a very interesting chart pattern as well.
Busy, busy week ahead. Tuesday kicks off the economic week with the Trade deficit and the Budget deficit. On wednesday, we have Retail sales, Import/Export prices, Business inventories and the FOMC minutes. Then on thursday, the weekly Jobless claims, the PPI, the NY FED, Industrial production and the Philly FED. Finally on friday the CPI, the bi-weekly Consumer sentiment, and OpsEx. Not to be left out of the loop the FED has two speeches scheduled for monday. The first from FED chairman Bernanke at the FRB around 10:00. The second is by FED governor Duke after hours at the FRB at 5:15. The topic for the day long forum is Addressing the Financial Needs of Small Businesses. The way the market set up this week this could be a very important event. Small businesses create over 80% of the new jobs. Corporations generally just expand and contract staff as the economy expands and contracts, and actually reinforce the existing trend. The way to get the economy back on track is to give entrepreneurs the access to the credit they need and tax incentives to create/expand businesses. Best to you and yours this weekend and week. 

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