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the Elliott Wave Lives On
by Tony Caldaro
July 17, 2010
weekend update
REVIEW
After a very busy economic reporting week stocks gave up all of the week's gains on options expiration friday. On the positive side, economically, the PPI/CPI stayed moderately negative, as did import/export prices, weekly jobless claims fell, business inventories rose, and the budget deficit improved. On the flip side, the trade deficit expanded, retail sales remained negative, the NY FED/Philly FED/Industrial production all declined but remained positive, and consumer sentiment declined. Technically, the market rose early in the week, went flat mid-week, and then declined to end the week in the red. For the week the SPX/DOW were -1.1%, and the NDX/NAZ were -0.7%. Asian markets lost 0.6%, European markets lost 0.3%, and the Commodity equity group was flat on the week. Bonds were +1.1%, Crude lost 0.1%, Gold lost 1.5% and the USD lost 1.7%. Next weeks economic reports center around housing, the BEA leading indicators, and the FED's semi-annual economic report to Congress.
LONG TERM: bull market
The above chart is all the SPX activity from 2007 until the present, 3 1/2 years. We titled it "SPXbearbull" because in OEW terms that is exactly what it represents. A bear market, then a bull market. In Objective Elliott Wave (OEW) all bear markets are large three wave structures, and all bull markets are large five wave structures. During the entire history of the DOW, going back to the year 1885, there has not been any exceptions. Not even the depressionary 1929-1932 bear market.
Every bear market is in essence a correction of a larger bull market. Bull markets often make new all time highs. Bear markets never make new all time lows. Since every correction is some form of three wave pattern. It is logical to conclude that every bear market is a three wave pattern. And it is!
From October 2007 to March 2009 the OEW long term trend was down and we were in a bear market. The simplest and often nastiest corrections are what we call zigzags: a 5-3-5 corrective pattern. As the market declined during the bear market OEW quantified the waves and the above labeled formation, a zigzag, unfolded. We identified that low within days of the event, had it labeled a zigzag, and then projected at least a 50% retracement rally. What followed was not only a 50% retracement rally, but a bullish five wave pattern up from the lows. And, the OEW long term trend turned positive. The above chart clearly defines the five waves and their exact reversal points as the market worked its way higher from SPX 667 in March 2009 to SPX 1220 in April 2010.
Now notice the technical indicators. Observe how the MACD turned negative at the early stages of the bear market and remained negative until it was over. Then the MACD started rising and turned positive during wave 3 of the bull market, and has remained positive. This is typical market activity for bull and bear markets. Notice how the RSI has been hitting extremely overbought levels during these five waves up. While the RSI never hit an extremely overbought level during the entire 2007-2009 bear market. Now observe how the 13 EMA crossed below the 34 EMA during the start of the bear market, and crossed back above during wave three of the current bull market. All three of these technical indicators, plus the bullish five wave pattern, suggest we have been in a bull market since March 2009.
The biggest advantage OEW has over all other Elliott wave techniques is that it quantifies each and every significant wave. The zigzag pattern that unfolded between October 2007 and March 2009 was created by the actual waves of the market, quantifed by OEW. There is no other acceptable pattern. That zigzag was created while it was unfolding, and 50 years from now it will still be there in an archive somewhere. When the market creates waves they never change!
During a bull market, a long term uptrend, there is usually a series of five wave structures to complete a larger five wave structure. This occurred most recently between October 2002 and October 2007. You can review that chart pattern using the chart link below. Currently we have only completed the first five wave structure into the April 2010 high and have been recently correcting that entire advance. We labeled the first five waves Primary wave I and the recent correction Primary wave II. Before this bull market ends, Primary waves III, IV and V should follow. Waves three and five should be another five wave structure, while wave four will be a corrective structure.
MEDIUM TERM: downtrend low at SPX 1011
During this Primary wave II correction we have been tracking three fibonacci retracement levels. The first, a 38.2% retracement of the entire five wave Primary I at the OEW 1107 pivot. The second, a 50.0% retracement at the OEW 944 pivot, and the third a 61.8% retracement at the OEW 869 pivot. In the first few days of July the SPX traded as low as 1011, within the 1107 pivot range, and started to rally. The weekly RSI had a positive divergence, and the MACD was quite oversold for a bull market. The daily RSI was the most oversold it had been since the bull market began, and the MACD had a positive divergence. The monthly RSI also hit its most oversold level since the bull market began. It was higher than the 1982, 1990, 1994, 1998 and 2002 lows, but lower than the 1986 and 2006 lows. These are the most recent four year presidential cycle lows. Which we have been expecting to occur in July or October of this year. After the SPX hit 1011 it then generated a proprietary WROC buy signal last week. These signals work quite well, in bull and bear markets, in identifying the beginning of uptrends before they are confirmed by OEW.
With nearly everything aligned for a Primary wave II low we started closely tracking the current rally. We monitor the wave structure looking for an impulse wave. Also we monitor the pullbacks and the technicals as the rally unfolds. What we have observed since the SPX 1011 low certainly looks like an impulse wave with all the proper characteristics. Therefore we have tentatively labeled the recent rally from SPX 1011 to SPX 1099 as Intermediate wave one of Major wave 1 of Primary wave III. Once the uptrend is confirmed by OEW we'll upgrade the wave labeling to the appropriate color.
SHORT TERM
Support for the SPX is at 1058 and then 1041, with resistance at 1090 and then 1107. Short term momentum is currently oversold. The rally from SPX 1011 to SPX 1099 travelled 88 SPX points and triple topped between tues/wed/thurs. On friday, as you are aware, the market sold off dramatically during options expiration. This pullback appears to be Intermediate wave two of Major wave 1. The typical pullbacks following this rally would be: 38.2% at SPX 1065, 50.0% at SPX 1055, and 61.8% at SPX 1045. Since both the 38.2% and 50.0% retracements fall within the range of the OEW 1058 pivot, this should be support for Intermediate wave two. Should the market break through the lower pivot at 1041, then this rally is probably just part of an ongoing Primary wave II correction. The internal wave structure of the rally also suggests important support at the OEW 1058 pivot. This was the exact low on July 8th. Once the market breaks through the OEW 1107 pivot an uptrend confirmation will likely follow. Best to your trading!
FOREIGN MARKETS
Asian market were mixed on the week for a net loss of 0.6%. India's BSE and Hong Kong's HSI are in confirmed uptrends.
European markets were also mixed on the week for a net loss of 0.3%. Only Spain's IBEX is in a confirmed uptrend.
The Commodity equity group were also mixed and finished flat on the week.
COMMODITIES
Bonds continue to uptrend and gained 1.1% on the week. 10 YR yields have dropped to 2.94%.
Crude continues its uptrend but lost 0.1% on the week. It remains in a wide trading range.
Gold lost 1.5% on the week as its downtrend from $1265 continues.
The downtrending USD lost 1.7% on the week, with the Euro and Yen both up over 2%.
NEXT WEEK
A much lighter economic calendar ahead this week. On monday we have the NHAI at 10:00, then Building permits and Housing starts on tuesday. Thursday we have the weekly Jobless claims, Existing homes sales, and the BEA Leading indicators. The FED, however, is quite busy this week. On tuesday FED governor Tarullo testifes before the Senate, and FED Director Roseman testifies before Congress. Then on wednesday and thursday FED chairman Bernanke gives his semi-annual monetary policy report to Congress. Best to your week!
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