Saturday, July 3, 2010

Da Bear has claws but might not be as bad as you think: Tony Caldaro's Objective Elliott Wave update

This bear might be a Teddy bear if it's just a C wave to finish a second wave down in EW terms! The markets may be showing their hands - just a little - perhaps....! 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 3, 2010

weekend update


Just about wherever you look it was a bad week for equities. Stock markets, worldwide, had their worse week since the beginning of the correction. The weekly/monthly economic reports did not fare much better. Early in the week personal income/spending was reported higher, along with PCE prices and Case-Shiller home prices. For the rest of the week, however, it was all downhill after that. Consumer confidence plunged, and, construction spending, pending home sales, factory orders and the payroll report all turned negative. Weekly jobless claims increased, and, the WLEI, ADP index and Chicago PMI were all lower. On monday stocks were about unchanged. But they too headed downhill after that. For the week the SPX/DOW were -4.75%, and the NDX/NAZ were -5.95%. Asian markets were -4.1%, Europe was -4.0%, and the Commodity equity group was -4.8%. Bonds were +0.7%, Crude was -8.5%, Gold was -3.5%, and the USD was -1.0%. Next week, a holiday shortened week, will be highlighted by ISM services and Consumer credit.
LONG TERM: bull market in correction
There are times, in bull and bear markets, when important tidbits of data, respected market opinions, and even the market itself appear to be going against the long term trend. If you are currently long term bullish this is obviously one of those times. A seasoned investor, at times like these, will frequently reassess their view as new data comes in, with detachment to the outcome. In fact, it is always best in any potentially emotional situation, to be the unbiased observer. In OEW we allow the market to forecast its own direction, and we use the tools we have available to track that market direction. The foundation of OEW is the long term trend, and the uptrends/downtrends (waves) within that trend. They remain decidedly bullish. During the past couple of months, however, some of the tools that usually support the long term trend have turned negative. This sometimes occurs during major corrections, such as this, but always occurs at the beginning of new bear markets. As a result of this conflicting data we have remained cautious during this correction. 
Many say we are in a bear market. But their definition of a bear market varies. Some say a 10% decline defines a correction, and a 20% decline defines a bear market. If that were true we agree. We are in a bear market since we are, and have been, expecting a correction of more than 20%. However, in OEW terms, bull and bear markets are defined by long terms trends, not by this or that percentage of advance or decline. For example, the more than 20% declines in 1990 and 1998 were not a result of bear markets. They were substantial corrections within the context of a long term bull market. Both of these corrections, btw, occurred during the 4 year presidential cycle bottoming process. We are in one of those bottoming processes right now in 2010. Let's review the longer term view and bring it into the present.

From Dec 1974 to Oct 2007 the market completed the fifth Cycle wave up from the depression lows of 1932. The other Cycle waves were: [1] 1932-1937, [2] 1937-1942, [3] 1942-1973, and [4] 1973-1974. Both Cycle wave bear markets, [2] and [4], created the biggest market declines of any bear market during the entire 1932-2007 Supercycle. Then between Oct 2007 and March 2009 the market had its biggest bear market since the 1929-1932 depression. In other words, the 2007-2009 bear market was the worst one since the 1929-1932 depression. And the two Cycle wave bear markets were the two worse bear markets prior to that.

During the 2007-2009 decline OEW quantified a zigzag (5-3-5) wave pattern into the Mar 09 low. Since then the quantified long term trend has turned up and the market has advanced in five quantified bullish waves off that low. We have labeled these waves as follows: Major wave 1 SPX 956 Jun09, Major 2 SPX 869 July09, Major 3 SPX 1150 Jan10, Major 4 SPX 1045 Feb 10, and Major 5 SPX 1220 Apr10. These five Major waves up completed Primary wave I of a new bull market. After the Apr10 high the market entered the current correction Primary wave II.  

MEDIUM TERM: downtrend low SPX 1011
Near the beginning of the correction we anticipated that it would unfold in three Major wave: an ABC. During the second week of the correction the market experienced a significant selloff. The SPX dropped 100 points intraday on May 6th and then recovered much of that loss before the close. That decline took the correction from the SPX 1220 high to a 1066 low. Over 12% below its high. Since the two prior corrections, Major waves 2 and 4, were only 9.1%, we realized this correction would be more substantial. After that flash low at SPX 1066 the market rallied to SPX 1174. At this time we offered five potential support areas during this correction, and noted the 4 year cycle was bottoming as well. The five support areas were: 1. the pivot at 1058 - the flash low, 2. the pivot at 1041 - Major wave 4, 3. the pivot at 1007 - 38.2% retracement of Primary wave I, 4. the pivot at 944 - 50.0% retracement, and 5. the pivot at 876 - 61.8% retracement.

The market declined to the 1058 pivot, paused, and then found support at the 1041 pivot. After an interim rally the market successfully retested the 1041 pivot. We labeled that low Major wave A. Then the market retraced 50% of the entire decline from SPX 1220. We labeled that high Major wave B. This week the market headed back down to the 1041 pivot, broke through it and found support at our third level of support - the 1007 pivot. This last decline is part of Major wave C. When this last Major wave ends Primary wave II should end as well.

The 4 year presidential cycle typically bottoms in July or October of that year. These cycles can be consistently traced back as far as 1934. Many significant lows have occurred during this bottoming phase: 1942, 1974, 1982, 1990, 1998 and 2002. The 2006 low was also quite noticeable during the last 2002-2007 bull market. The type of cycle low we are expecting this time is a multi-month correction where the market declines about 20%. Currently Primary wave II just entered its third month of the Apr-July correction and the market has already declined 17.1%, (1220-1011). The 20% threshold will be reached at SPX 976, and this is close to our next support area at the 944 pivot. The way this market is moving now we could see a correction low this month.

There are, however, some conflicting factors that suggest a more negative outcome. Our WLEI (weekly leading economic indicator) turned negative a few weeks ago suggesting a contraction, if not a recession, is now underway. Public sentiment has remained bearish throughout the bull market. The FED's adjusted monetary base, which had expanded since mid to late 2008, has contracted and then flattened out over the past several months. None of these economic indicators support a positive outcome. The only period in recent history when the stock market worked its way through these types of negatives was the 1990 correction. Therefore we remain cautious during this correction.

Support for the SPX remains at 1018 and 1007, with resistance at 1032 and then 1041. Short term momentum ended the week near neutral. Major wave A bottomed at SPX 1042, and Major wave B topped a week ago monday at SPX 1131. Since then this market has headed straight down, through the 1041 pivot, and it hit the 1007 pivot on thursday. This decline, while it does not look quite complete yet, should end Intermediate wave A of Major wave C. After it ends, probably with a retest of the 1007 pivot, we should get another one of those 80 point rallies for Intermediate wave B. Then another decline should follow, probably about 130 points, into the final low near the OEW 944 pivot. Many technical indicators we follow are already quite oversold after the recent decline. This usually suggests a short term bottom is just day(s) away. Best to your trading, and enjoy the holiday!

Asian markets were all lower on the week for a net loss of 4.1%. Both India's BSE and Hong Kong's HSI remain in confirmed uptrends, and Australia's ASX has confirmed an ABC Primary wave II correction.
European markets were all lower on the week for a net loss of 4.0%. Only Germany's DAX remains in a confirmed uptrend, and the Swiss SMI has confirmed an ABC Primary wave II as well.
The Commodity Equity group were all lower as well for a net loss of 4.8%. Only Brazil's BVSP remains in a confirmed uptrend.

Bonds gained 0.7% on the week as their uptrend continues. The 10YR yield dropped under 3% this week for the first time since the second quarter of 2009.
Crude lost 8.5% on the week as there was steady selling all week long. It's in an uptrend from the May $67 low, but that uptrend is being seriously challenged.
Gold lost 3.5% on the week as the choppy Minor wave 5 gave way and a new downtrend was confirmed. Gold may come under some heavy selling pressure, at times, during the next couple of months. Silver and Platinum are likely to underperform Gold.
The USD lost 1.0% on the week and confirmed a downtrend as well. Would expect the weekly RSI to get oversold before this correction ends. The inverse would apply to the Euro (+1.6%).

A light economic claendar ahead in this holiday shortened week. Tuesday at 10:00 we have ISM services. Then on thursday the weekly Jobless claims and Consumer credit. On friday Wholesale inventories. The FED, currently, does not have anything on the agenda. Looks like a technical week for the stock market. Best to you and yours!


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