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the Elliott Wave Lives On
by Tony Caldaro
July 24, 2010
weekend update
The market had another strong week while economic indicators continue to erode. First the economic front. While economic reports were sparse this week they were mostly heading in the wrong direction. Weekly jobless claims rose, the monthly BEA leading indicators declined, and our WLEI declined again. In addition, the home builders index declined, along with housing starts and existing home sales. The only positive on the week was the rise in building permits. Nevertheless the market had a strong week, the SPX/DOW were +3.4%, and the NDX/NAZ were +4.0%. The foreign markets also rose, with Asia +2.3%, Europe +2.4%, and the Commodity equity group +4.0%. Bonds dropped 0.4%, Crude gained 3.7%, Gold dropped 0.3%, and the USD was flat on the week. The upcoming week will be highlighted by the Case-Shiller home prices index, the FED's Beige book, and our first look at Q2 GDP.
LONG TERM: bull market
Last week we covered why we are tracking the advance from the March 2009 SPX 667 low as a bull market. This week we will reveiw our working SPX weekly chart of the previous bull market, (2002-2007), the bear market, (2007-2009), and current bull market. This chart, along with 200+ others, are available in the link at the bottom.
Before we get started we would like to mention that the world is so intertwined these days that very little occurs in isolation. Markets halfway around the world can impact the world's markets for a day, a week or even months. Currencies can and do impact stock markets, as well as interest rates. To keep in tune with worldwide events on a technical basis we publicly cover the US, many of its sectors, and thirteen key foreign markets. We also track the USD index, seven foreign currencies, US interest rates, commodities, the precious metals, and currently 40+ stocks. Everything we cover has a daily and weekly chart, except the SPX and DOW. They also have hourly and monthly charts. Naturally, anything we expect to occur in the US should also be supported by similar events in the rest of the world. Markets can not be analyzed in isolation.
We started this blog in mid-2005, when most of the EW'ers were bearish, and our bullish projections were not easily accepted. Five years later we again appear to be at a similar juncture. During the 2002-2007 bull market OEW quantified the waves and we labeled them. Notice the MACD stayed above neutral throughout, the 13 EMA stayed above the 34 EMA except for an occassional dip below, and the RSI formed divergences at many of the wave peaks and some of the wave bottoms. The entire bull market was a Primary wave V, with five Major waves and the fifth Major wave extended.
After the 2007 top everything started to reverse. The MACD dropped below neutral, the 13 EMA broke through the 34 EMA, and the RSI never got overbought spending most of its time oversold. OEW quantified the waves and we counted a 5-3-5 zigzag into the Mar 09 low. At that low we had a positive divergence on the MACD and RSI. Since that low the MACD has been staying above neutral, the 13 EMA has spent most of its time above the 34 EMA, and the RSI again is getting overbought with divergences at the wave peaks. Technically, 2009-2010 looks a lot like 2002-2007 and nothing like 2007-2009. In addition, we count five waves up from the Mar 09 low to complete a bullish Primary wave I, and the recent Primary wave II correction is more complex and steeper than the two previous corrections, Major waves 2 and 4. After nearly thirty years of Elliott Wave analysis, and having examined every wave during the past now 125 years of historical data, the highest probability for this type of market activity is a classic Elliott Wave bull market. A much, much lower probability would be assigned to a bear market rally. Yet, most EW'ers are bearish!
MEDIUM TERM: downtrend low SPX 1011
While OEW was quantifying the waves during the advance from March 2009 to April 2010 we observed that both Major wave corrections were simple, took about one month, and declined about 9%. After OEW confirmed the downtrend the market experienced that one day 'flash low' selloff/rebound. Shortly after that event in early May, we projected that the correction would last a few months, identified three potential fibonacci retracement levels, and expected the end of the correction to coincide with the four year presidential cycle low. Our target for a bottom was either July or October, and the retracement levels were: 38.2% at the OEW 1007 pivot, 50.0% at the OEW 944 pivot, or 61.8% at the OEW 876 pivot.
As the correction unfolded we noted a double bottom at the OEW 1041 pivot in early June and marked that the end of Major wave A. A 50% retracement rally then unfolded into late June and we marked that Major wave B, of the ongoing three Major wave - Primary wave II correction. The market then declined to a new low for the correction near the 38.2% retracement 1007 pivot. The rally off that low started a bit choppy but then started impulsing and generated a WROC buy signal. These buy signals have a better than 80% success rate at signalling new uptrends. With an oversold weekly MACD and a positive weekly RSI divergence, plus many other positive technicals, we suggested that the SPX 1011 low may have ended Primary wave II. We then posted a green, tentative, label on the charts. In the meantime we received our first confirmed uptrend in the SPX sectors and two foreign indices were already in uptrends.
After making an initial rally high at SPX 1099 the following week, an 88 point gain from 1011, the market sold off dramatically on Ops-Ex day and found support at the next lower pivot 1058. Early this week that pivot was tested three more times before the market rallied to higher highs on friday at SPX 1104. We had labeled the SPX 1099 level as Intermediate wave one last week, and the SPX 1057 level as Intermediate wave two this week. From that tuesday low we should now be in Intermediate wave three.
While all this was transpiring the market generated another WROC buy signal. Double signals in one month are quite rare. Several more SPX sectors confirmed uptrends pushing the number to five of nine. The NYAD confirmed an uptrend, and now five of the thirteen foreign markets we track are in confirmed uptrends. The technicals are looking quite positive for a potential OEW SPX/DOW uptrend confirmation soon. Economically, however, we have some concerns.
In addition to tracking the technicals of the markets we also track a few quantifiable economic indicators. The one that is giving us the greatest concern is what we call the WLEI, weekly leading economic indicator. Generally, when this indicator is above 50% the economy is expanding, and below 50% contracting. Historically, whenever the WLEI drops to a contracting 47% or below it has been trouble for the stock market. Over the past fifty years, whenever the WLEI has dropped to 47% or lower the market has corrected about 20% or more and often entered a bear market. This week the WLEI dropped to an alarming 39.5%. Since the market has already corrected about 17% during the past three months and has started to advance again. We reviewed the historical data to find two other similar events. In 1990 and 1998 the WLEI dropped below 47% and the market corrected about 20%. In 1990 a shallow recession followed but the bull market continued. In 1998 there was no recession and the bull market continued. What we also noticed was that after the market finished its correction, in both 1990 and 1998, the WLEI started to improve the following month and eventually turned positive again as the market continued higher. What this analysis suggests. If the market has indeed ended this correction at SPX 1011 we will need to see some improvement in the WLEI in August to continue this stock market advance into September. If not, the recent low may only be Major wave A of Primary wave II, and this potential uptrend Major wave B. This count would suggest a 4 year cycle low bottom in October with a retest of the OEW 1107 pivot or lower.
Our goal is to be as objective as possible by including as much quantitative data as possible. This sometimes will mean some slightly mixed signals during some junctures of bull and bear markets, allowing for potential alternate counts. For now the highest probability is that the bull market is resuming. After we get an OEW uptrend confirmation we'll address these other indicators as the uptrend unfolds. Until then we are still working with probabilities.
SHORT TERM
Support for the SPX remains at 1090 and then 1058, with resistance at 1107 and then 1136. Short term momentum ended the week slightly overbought. As noted earlier we labeled the SPX 1011 low as the potential end of this correction. Then we labeled SPX 1099 as Int. wave one, SPX 1057 as Int. wave two, and Int. wave three should be underway now. The OEW short term charts are positive and are displaying a small wave 1 (SPX 1089) and wave 2 (SPX 1065) off the SPX 1057 low, with wave 3 underway now. We also noted earlier that the double WROC buy signal is a rare event. This suggests an uptrend is unfolding and the likely price target is between the OEW 1187 pivot and the OEW 1291 pivot. If this potential uptrend remains impulsive the upper pivot should be reached around October. If not, the lower pivot comes into play.
For now, this market still has to clear the OEW 1107 pivot before we have any chance of getting an uptrend confirmation. Important support remains at the, four times tested, 1058 pivot and key support at the 1041 pivot. This week the SPX sector XLI (industrials) confirmed an uptrend. This would suggest the DOW may be the first to confirm of the four major indices. Best to your trading!
FOREIGN MARKETS
Asian markets gained 2.3% on the week, all were higher. India's BSE and Hong Kong's HSI are in confirmed uptrends.
European markets gained 2.4% on the week, all were higher. England's FTSE and Spain's IBEX are in confirmed uptrends.
The Commodity equity group gained 4.0% on the week, all were higher. Brazil's BVSP is in a confirmed uptrend.
COMMODITIES
Bonds lost 0.4% on the week during its uptrend. Bond prices are displaying a negative divergence at the recent highs, but not yields.
Crude gained 3.7% on the week as its uptrend continues.
Gold lost 0.3% on the week while its downtrend continues. Expecting a low in August.
The USD was flat on the week after a couple of volatile days. The EUR (-0.2%) and JPY (-1.1%) remain in uptrends.
NEXT WEEK
Monday kicks off a busy week with New homes sales at 10:00. Case-Shiller and Consumer confidence are reported on tuesday. On wednesday Durable goods orders and the FED's beige book. On thursday the weekly Jobless claims. Then on friday Q2 GDP, the Chicago PMI and Consumer sentiment. The FED has nothing scheduled at the moment. Best to you and yours this weekend!
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