Saturday, August 21, 2010

Stock market tested important support Friday while gold impulsing higher: Tony Caldaro's Objective Elliott Wave weekend update

The market tested the area around $SPX 1060 AGAIN yesterday...! Traders and investors need to figure out whether the weakness we've seen is a harbinger of more to come. Our year 2010 plan had been a high in May and possibly topping (or lower high) in August. Assuming we go up for one more rally over the next week or so, do we then see down into October? That's what we have been thinking. Elliott Wave traders will want to know if the decline will be simply an extended pullback or something more bearish. 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
August 21, 2010

weekend update


The pullback that started about two weeks ago from the uptrend high at SPX 1129, made a low on monday, rallied to SPX 1100 midweek, and then made a lower low on friday. The net result for the week, however, was mixed just like the economic reports. On the economic front. Housing starts/permits and the NAHB index all declined. Weekly jobless claims rose and the Philly FED entered contraction mode. On the flip side. The NY FED rose, along with the PPI, industrial production, capacity utilization and the leading indicators. The US markets were mixed with the SPX/DOW -0.8%, and the NDX/NAZ +0.4%. Asian markets were +0.2%, Europe was -1.8%, and the Commodity equity group was +0.2%. Bonds were flat on the week, Crude was -2.1%, Gold was +1.0%, and the USD was +0.1%. On friday FED chairman Bernanke gives a speech about the Economic Outlook and the FED's monetary response, at Jackson Hole, WY., less than two hours after the first revision to Q2 GDP.
LONG TERM: bull market
While the bull/bear market and slow growth/double dip economic debates continue we often "can't see the forest for the trees." Many of us get so caught up in what the market or the economy (the trees), is currently doing and lose track of the big picture (the forest). When it comes to investing the big picture is the long term trend. Is it up, is it down or is it changing? RN Elliott did not spend any appreciable amount of time on explaining how to determine a long term trend. He used channeling and the wave structure to determine whether or not the longer term trend was up or down. As a result most EW'ers use a similar approach. OEW, however, is based on objectively determining the long term trend. The long term trend supercedes all internal wave counts and is the foundation of OEW.

Nearly three decades ago I took the forest and the trees approach when researching the Elliott Wave. At first I was also interested in the little squiggles and trends that created the waves. Then after a few ups and downs I set out to determine if EW can actually quantify the long term trends. All the long term trends from the year 1885 until the early 1980's. Then if it could, did these trends still fit within the general guidelines of the Elliott Wave Theory. In the end the answer was a resounding yes. Not only could the long term trends be quantified, but even the medium term trends which are the actual waves of the markets. The Elliott Wave Theory then became Elliott Wave Fact!

Determining the long term trend is one of the most important factors in investing. If the trend is up and the investment declines after one buys at a higher price. One can wait for a recovery. These types of opportunities do not usually arise when the long term trend is down. Some long term trends can be quite powerful and can force one to stay in or out of a market despite all the associated positive/negative news. Two recent examples; 

1. The 1987-2000 long term uptrend in the stock market. Despite a recession in 1990 and several currency crises during the 1990's the DOW rose from 1616 to 11,750.

2. The 2001-current long term uptrend in Gold. At its recent July high gold hit $1,265/oz. When the bull market started nine years ago gold was at $255/oz.

When one hears the expression; "The trend is your friend." Remember it is not the medium term trend this saying applies to, but the long term trend. When we post a bull or bear market next to the long term status we are referring to the quantified OEW long term trend. Bull markets can only unfold in long term uptrends. Bear markets in long term downtrends. The US stock market, along with many foreign stock markets, is in a long term uptrend.
MEDIUM TERM: uptrend
After five Major waves up from the Mar09 SPX 667 low the market topped at SPX 1220 in Apr10. For the next three months the market corrected this five wave rise and then found support in July10 at SPX 1011, for a 38.2% retracement of the entire previous advance. After that low the market started to rally, confirmed an uptrend, and recently hit SPX 1129 on Aug 9th. This rally from the July 2nd low started off quite strong and then became a bit choppy after it hit SPX 1121 in late-July. We're counting this advance as five Minor waves up, to complete Intermediate wave one, and this count is posted on the SPX hourly chart. From the SPX 1129 high the market has now pulled back in an ABC corrective wave into important support at the OEW 1058 pivot. We're counting these three waves as Minor waves as well, and Intermediate wave two.
On friday, Ops-Ex friday, some interesting technical relationships appeared. The wave A decline of this pullback was exactly 60 points (1129-1169). The wave B rally double topped at SPX 1100 for a 31 point gain or about a 50% retracement. The wave C decline has thus far traveled 36 points (SPX 1100- 1064). Then the market rallied eight points into a SPX 1072 close. This sets up the following technical relationships for this pullback:
1. Wave C is nearly equal to 61.8% (SPX 1063) of Wave A.
2. The pullback has found some support within the range of the OEW 1058 pivot (SPX 1051-1065)
3. The pullback is nearly equal to a 61.8% (SPX 1056) retracement of the entire previous advance (SPX 1011-1129).
4. With the weak Minor wave 5 (SPX 1107-1129) the market has nearly pulled back to a natural wave two support SPX 1057.
5. At the low there were positive divergences on all timeframes up to the daily charts.  
These types of setups are usually quite good. Naturally there are no guarantees. But this setup is certainly well worth watching as it plays out next week. 
Support for the SPX remains at 1058 and then 1041, with resistance at 1090 and then 1107. Short term momentum hit oversold on friday and setup a positive divergence. Key support remains at the OEW 1058 pivot, and very important support at the OEW 1041 pivot. On the upside the SPX needs to get into the mid-1070's to start turning positive again. Then the mid-1080's to turn the OEW short term charts positive again. Then to recapture the 1090 swing pivot to get the uptrend moving again. Naturally SPX 1100 and then 1130 are technical overhead resistance after that. Best to your trading!
Asian markets were mixed for the week with an average gain of 0.2%. All indices remain in uptrends except Japan's NIKK.
European markets were all lower on the week for an average loss of 1.8%. All indices remain in uptrends.
Commodity equity group were mostly higher for an average gain of 0.2%. All three indices remain in uptrends.
Bonds ended flat on the week as yields on the 10YR dropped to nearly an 18 month low at 2.55%.
Crude had another down week, -2.1%, as it uptrend remains under selling pressure. This remains a choppy market.  
Gold gained 1.0% on the week during this uptrend. Watching this uptrend closely. It's still impulsing higher.
The USD gained 0.1% on the week mostly against the EUR (-0.3%). Thus far, the only currency to weaken during the DXY rally has been the EUR.
Not too busy for the week ahead. Looks like monday and friday will be the most important days, technically. On tuesday at 10:00 Existing home sales. Then on wednesday, Durable goods and New home sales. Thursday we have the weekly Jobless claims. Then on friday the first revision to Q2 GDP, expectations are between 1.3% and 1.4%, and the bi-weekly Consumer sentiment reading. The FED is at Jackson Hole, WY. the end of this week for that annual event. On friday FED chairman Bernanke gives a speech at 10:00. Best to your weekend and week!


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