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the Elliott Wave Lives On
by Tony Caldaro
July 31, 2010
weekend update
REVIEW
Friday not only ended the week but also the month, and a good month it was. While July started off the month by making new downtrend lows in the first few days. It ended the month with the best monthly performance since July 2009: +6.9%. If you recall July 2009 was the beginning of a six month uptrend. For the week, however, the market was relatively flat: SPX/DOW were mixed, and the NDX/NAZ were -0.65%. The economic reports were plentiful and much better than last week. On the downside, consumer confidence, durable goods orders, the WLEI, and the Q2 GDP declined to 2.4%. Case-Shiller home prices rose, however, as did new homes sales, the Chicago PMI, and consumer sentiment. Jobless claims improved a bit too. Foreign markets performed better than the US. Asia was +0.8%, Europe gained 0.1%, and the Commodity equity group added 1.4%. Bonds gained 0.9%, Crude slipped 0.2%, Gold lost 0.7%, and the USD dropped 1.1%. This weeks economic highlights include the monthly payrolls report, ISM and Auto sales.
LONG TERM: bull market
When we look around and see the current economy declining to 2% growth, unemployment still over 9%, bank credit tight, and the M1 money multiplier still under one. And, longer term there are increasing structural problems; like our unfunded long term debt obligations, the enormous budget deficit - which is leading to even greater debt obligations, and the FED monetizing debt. One could certainly wonder how could anyone be bullish at this time. The answer to this question would be twofold. First, markets decline when there is lots of uncertainty, and/or when the economic problems are getting worse and there does not appear to be any current solutions. This is not the situation now. The problems are well known and the economy is still on the mend. Second, the market has been rising since early March 2009 and is currently up 65% from that low despite the recent 17% correction. Rising markets help to create confidence in the corporate sector. Corporations can then raise funds, through secondary stock offerings or debt issuance, for capital expenditures and expansion. Investment creates jobs, which in turn, creates the confidence needed in the banking sector for them to start lending to small businesses. Small businesses, in turn, are started or expanded and they create new jobs. In other words, a rising stock market creates the foundation for an improving economy. Stock markets, in a sense, climb the wall of worry.
While we are certainly not economists and could not get into much more detail than what was just stated. We do know markets and we can quantify the difference between a bull market and a bear market rally. Bear market rallies advance in three significant waves. Bull markets in five significant waves. Bear market rallies lead to hope while they are rising. Eventually, however, the problems return or new problems arise and uncertainty returns as the market declines. Bull market rallies continue to build upon themselves with corrections along the way. The economy reverses its contraction, turns strongly positive, stabilizes at a lower level, and then starts to build again as confidence returns. Despite all the doom and gloom we are not seeing a bear market three wave rally. We are seeing a bull market five wave rally!
MEDIUM TERM: DOW in confirmed uptrend, awaiting SPX
As you can observe by the DOW chart posted above we have five waves up from the Mar 09 low into the Apr 10 high. This completed Primary wave I of the current bull market. After the April high the market went into a three month correction bottoming in early July. In SPX terms Primary wave I advance from 667 to 1220 for a gain of 83% in just thirteen months. Then the SPX corrected from 1220 to 1011, a decline of 17%, into early July. At the Mar 09 low we had positive RSI/MACD divergences in both the DOW and the SPX. Then at the Primary wave I high a negative MACD divergence in both. Now at the early July 10 low we have another RSI positive divergence, and the typical MACD oversold condition that occurs during bull markets, not bear markets.
From the SPX 1011 low, which was a 38.2% retracement of Primary wave I, the market has impulsed higher. The DOW confirmed an uptrend and the SPX is close to confirming an uptrend as well. Five of the nine SPX sectors we follow have recently confirmed uptrends. Even eight of the thirteen foreign markets we follow, nearly all are in bull markets too, have confirmed uptrends. If recent history is any guide the SPX should confirm an uptrend as well early next week.
Remaining with the currect OEW pattern we're expecting this uptrend to be Major wave 1 of Primary wave III. Once the SPX uptrend is confirmed our tentative target would be SPX 1291 by October. This market appears to be rising in three month cycles. The recent early July low could also be considered the bottoming of the 4 year presidential cycle. This month's market performance +6.9%, the best month in the last year, would suggest that bottom has occurred.
SHORT TERM
Support for the SPX remains at 1090 and then 1058, with resistance at 1107 and then 1136. Short term momentum was oversold on friday and rose to neutral during the day. As this rally has unfolded we have been labeling the waves as they appear on the short term OEW charts. We counted an impulse wave from SPX 1011 to 1099 and labeled it Intermediate wave one. The pullback that followed to SPX 1057 we labeled Intermediate wave two. Then Intermediate wave three began. Thus far this wave appears to be subdividing. While Intermediate wave one was a simple five Minor wave rally. Intermediate wave three, just this friday, suggested it will be a bit more complex. Currently we have Minor wave 1 at SPX 1089 and Minor wave 2 at SPX 1065. The next rally ran to SPX 1121, but the next pullback overlapped the recent SPX 1089 high when it dipped to 1088 on friday. This suggests that Minor wave 3 is now subdividing. Therefore we have counted the SPX 1121 high as Minute wave 1, and the pullback to SPX 1088 as Minute wave 2.
With a slight positive RSI divergence on the hourly chart and a sufficiently oversold MACD, we're expecting Minute wave 3 to be underway now, if not shortly. Also, we can now raise our 'key' support pivot from SPX 1041 to SPX 1058. With the current wave structure the OEW 1090 pivot is support and the OEW 1058 pivot is key support. A break below the 1058 pivot would put the wave structure of the entire rally from SPX 1011 to 1121 in question. Overhead resistance is at the OEW 1107 pivot, and then, the OEW 1136 pivot. Once the market clears the 1107 pivot it should be on its way higher. Best to your trading!
FOREIGN MARKETS
The Asian market gained 0.8% on the week. India's BSE, Hong Kong's HSI and China's SSEC are all in confirmed uptrends.
The European markets were flat +0.1%. England's FTSE, Spain's IBEX and the Europe's STOX50 are all in confirmed uptrends.
The Commodity equity group gained 1.4% on the week. Brazil's BVSP and Russia's RTSI are in confirmed uptrends.
COMMODITIES
Bonds extended their uptrend this week gaining 0.9%. Yields closed at 2.91%, their lowest level since the spring of 2009.
Crude remains in an uptrend but slipped 0.2% on the week.
Gold made new lows for its downtrend at $1156, and was down 0.7% on the week.
The downtrending USD lost 1.1% on the week as the EUR (+1,2%) and JPY (+1.2%) continued their uptrends.
NEXT WEEK
Another busy economic week ahead. On monday, Construction spending and ISM manufacturing at 10:00. Then on tuesday; Personal income/spending, PCE prices, Factory orders, Pending homes sales and the monthly Auto sales. Wednesday we have ISM services, and then on thursday the weekly Jobless claims. Friday we have the Payrolls report, the Unemployment rate, and Consumer credit. As for the FED. FED chairman Bernanke gives a speech on monday, at 10:15, in S. Carolina. Best to your week!
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