Saturday, August 28, 2010

Up or down? Here's your friend to know the trend & ride it in equities, bonds, currencies & commodities: Tony Caldaro's Objective Elliott Wave update

Traders are keen to assess whether the stock market finished an important low yesterday, testing levels that were a symmetrical ABC drop (as I was tweeting this week) and possible double bottom there around SPX 1040. Now what - up or down?? 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. But are we wrong and heading way up?? 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 28, 2010

weekend update


The market pushed the OEW uptrend scenario to its absolute downside limit this week as the SPX traded down to the OEW 1040 pivot twice. It was make or break time from wednesday to friday, and so far the uptrend has held support. The economic front was not much help. Despite the light calendar the bias was definitely to the downside. Existing/new homes sales fell, Q2 GDP was lowered to +1.6%, and consumer sentiment declined. On the upside were durable goods orders, weekly jobless claims fell, and the WLEI edged higher. On friday the stock market recovered almost back to monday's close avoiding a larger negative week. For the week the SPX/DOW were -0.65%, and the NDX/NAZ were -1.55%. Asian markets lost 1.7%, European markets were -0.2%, and the Commodity equity group was -0.1%. Bonds were -0.3%, Crude gained 1.8%, Gold rose 0.8%, (Silver was +6.0%), and the USD slipped 0.2%. Next week there is a plethora of economic reports. FOMC minutes, Auto sales, ISM reports and the Payrolls report on friday highlight the week.

LONG TERM: bull market
Last week we touched upon the importance of the long term trend. While everyone is quite familar with our long term bullish count on the equity market. We decided this week to spend more time with the much ignored concept of the long term trend. As noted last week, long term uptrends are almost always bull markets and long term downtrends bear markets. What differentiates a bull market from a bear market rally, in a long term uptrend, is the wave structure during the advance. During a bear market rally the downtrends will often overlap the preceding uptrends leading to a corrective ABC wave structure. During bull markets the downtrends will only occasionally overlap the uptrends after a five wave advance, of some lesser degree, has occurred.

OEW uses a quantified approach to detemine the medium term trends, (the waves), and the long term trend as well. We also use a handful of leading indicators to help us determine when a medium term/long term trend is likely changing. We post these potential scenarios with "green" labels on the charts, and then upgrade to labeling when an OEW confirmation occurs. This is certainly not a new concept. I have been personally using this approach for nearly 30 years. And prior to using it I had researched the previous 95 years of accurate market data, (1885-1980), to confirm that this is the way the market works.

As noted last week, there was a record long term uptrend in the SPX/DOW from 1987-2000. The DOW rose during that period from 1616 to 11,750. The previous record was for the DOW from 1921-1929. Historically, long term uptrends usually last about three to five years. These are the times for the buy and hold strategy so often mentioned in the financial press. And, the often noted "The trend is your friend." mantra. The trend is not your friend, nor is buy and hold the proper strategy during a long term downtrend. Nearly 80%, or more. of the stocks decline during bear markets. Currently we are also witnessing a record uptrend for Gold. Gold has been an uptrend since 2001, when it bottomed at $256/oz. It closed this week at $1,238/oz.

Since our approach to quantifying waves and long term trends is proprietary we can not disclose this type of information. Yet, what we can do is provide a list of the current long term trend status for the major markets we track. If we leave one of your favorites out, just post a comment below and we'll provide you the long term trend status on that market.
SPX/DOW/NDX/NAZ uptrend and bullish
ASX/BSE/HSI uptrend and bullish, NIKK/SSEC uptrend but corrective
DAX/FTSE/SMI/STOX uptrend and bullish, IBEX uptrend but corrective
BVSP/RTSI/TSX uptrend and bullish
BONDS unconfirmed uptrend and corrective
CRUDE uptrend but corrective
GOLD/SILVER uptrend and bullish
USD unconfirmed uptrend and corrective

MEDIUM TERM: uptrend in jeopardy
The current uptrend that began in early July at SPX 1011 and hit SPX 1129 in early August has been under considerable selling pressure of late. This week the SPX declined to 1040 on wednesday and retested that low again on friday before rallying into the close. This 89 point decline from the high represents a 75% retracement, and a 7.9% decline. This is quite steep for an ongoing uptrend and the percentage drop is greater than any pullback, in an uptrend, during this entire bull market. These technicals alone suggest that the market is already in an unconfirmed downtrend. Should the important OEW pivot at 1041 be broken a downtrend confirmation would likey follow. Under this scenario the alternate count posted on the DOW would then be the preferred count. This count suggests the July low was Major wave A, and the August high Major wave B of an ongoing ABC Primary wave II complex correction. It also suggests that the four year presidential cycle low has not occurred yet, and will then likely occur in October, the most common month. Also, supporting this view is the persistent weakness in the fundamental indicators we follow. At the beginning of the month we suggested that these indicators needed to improve to keep the uptrend trending higher. The month is over, and the only thing that has improved is that they stopped going down and thry flattened out. This would put us back on the original Primary wave II projection of a decline into the OEW 944 pivot by October.

Despite these potential/actual negatives we continue to maintain a more favorable count on the SPX charts. In long term uptrends, bull markets, one should favor a positive outcome. The pullback from the recent high has had good symmetry. The initial decline was 60 points, then a 30 point rally, followed by another 60 point decline. This can be counted as an ABC Intermediate wave two zigzag pullback with the A and C waves equal. As long the OEW 1041 pivot holds and the market continues its strong friday rally into next week and beyond this count will hold. Any additional weakness to the downside and we're back in correction mode for several more weeks.

Support for the SPX moved up to 1058 and then 1041 on friday, with resistance now at 1090 and then 1107. Short term momentum has an extended positive divergence in place after the wed/fri SPX 1040 lows. Under either of the SPX/DOW scenarios posted above we'd expect the rally to continue for a few days and approach the 1090 pivot. The hourly RSI has reached its most overbought level since the SPX was at 1100. And, if it can stay above neutral (50) during the next days the daily RSI can get overbought. Naturally we'll evaluate this potential advance as it unfolds. Best to your trading!

Asian markets were all lower on the week for a net loss of 1.7%. All indices remain in uptrends except for the NIKK.
European markets were mixed on the week and the net loss was 0.2%. All indices remain in uptrends.
Commodity equity group were mostly higher on the week but a net loss of 0.1%. All indices remain in uptrends.

Bonds lost 0.3% on the week with the entire decline on friday. Treasury prices remain in uptrends. The 10YR hit 2.42% on wednesday.
Crude gained 1.8% on the week after a wednesday low. It remains in a downtrend from the early August $83 high.
Gold gained 0.8% on the week as its uptrend continues. There's currently a negative divergence on the daily chart after a nice five waves up.
The USD was relatively flat this week -0.2%. It will not take too much of a decline in the EUR to confirm as downtrend, which would support a USD uptrend.

Lots of economic reports on this weeks calendar. On monday, Personal income/spending and PCE prices at 8:30. Tuesday we have the Case-Shiller index, Chicago PMI, Consumer confidence, and then the FOMC minutes at 2:00. Wednesday, the ADP index, Construction spending, ISM manufacturing and monthly Auto sales. Then on thursday, the weekly Jobless claims, Q2 Productivity, Factory orders and Pending homes sales. Friday is Non-farm payrolls, the Unemployment rate and ISM services. Besides the FOMC minutes on tuesday, the FED offers Foreign exchange rates on wednesday and a speech from FED governor Duke at the FED in Wash, DC. Best to your week!


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