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the Elliott Wave Lives On
by Tony Caldaro
September 18, 2010
weekend update
It was a good week for stocks and a fairly good week for economic indicators too. On the positive side: retail sales, business inventories, import/export prices, the PPI and CPI all improved. The budget deficit impoved a bit, jobless claims were flat, and the WLEI and M1 multiplier both improved. On the negative side: the NY FED and Philly FED were lower, the current accounts and consumer senitment both declined, and industrial production/capacity utilization were flat. As for the markets: the SPX/DOW gained 1.45%, and the NDX/NAZ gained 3.35%. Asian markets rose 2.2%, European markets slipped 0.6%, and the Commodity equity group was -0.1%. Bonds were +0.7%, Crude lost 3.1%, Gold rose 2.3%, and the USD lost 1.6%. This week will be highlighted by the FOMC meeting, housing, and the leading indicators.
LONG TERM: bull market
Despite the ongoing weakness in the economy our OEW analysis suggests that equities will remain in a bull market into 2011/2012. The market is in a long term uptrend, which began in Mar09, after one of the worse bear markets since the 1930's. The long term uptrend continues to look solid and the wave structure from the Mar09 has been an impulsive five waves. While many doubt that this is a bull market because of the significant fundamental problems facing the developed nations. The emerging markets appear to be doing much better and are supportive of global growth.
With this scenario in mind we took a look at the Dow Jones World Index. We analyzed the long, medium and short term charts. To our surprise this index, which represents the largest companies in the world, looked very much like the SPX, the FTSE and several other foreign indices. As you can see from the chart below the world index topped around Oct07 and then plummeted 60% into a Mar09 low. Since then, however, this world index has advanced in five Major waves for Primary wave I, completed Primary wave II, and is now uptrending in its first wave off that low. This index looks exactly like the SPX, DOW, NDX and FTSE. The US and the world are in a bull market, with a few exceptions.
MEDIUM TERM: uptrend
A quick review of the SPX wave count from the Mar09 low: Major wave 1 SPX 956 Jun09, Major wave 2 SPX 869 Jly09, Major wave 3 SPX 1150 Jan10, Major wave 4 SPX 1045 Feb10, and Major wave 5 SPX 1220 Apr10. Notice the similarities in the advances, declines and the timing of the waves between the SPX and DJW. Nearly identical! Now notice that the DJW bottomed around the end of the second quarter, while the SPX bottomed in the first few days of the third quarter: Primary wave II SPX 1011 Jly10. Since that low the DJW and SPX have moved in unison: with a nice rally in July, a big pullback in August, and now another rally in September. Recently both made minor new highs for their uptrends.
Reviewing the SPX uptrend from the July 1st low at SPX 1011. We observe, what appeared to us from our short term OEW charts, a five wave advance to a double top at SPX 1129 on August 9th. Then a nasty, 7.9% decline, double zigzag into the August 31st low at SPX 1041. The severity of this decline was unexpected as the largest pullback, during an uptrend, for the entire bull market had been 6.5%. And, the decline nearly triggered a downtrend confirmation, but held support at the critical OEW 1041 pivot. Since then the market has rallied impulsively to a friday high of SPX 1131, 90 SPX points (8.7%) in 12 trading days.
We had labeled the initial advance to SPX 1129 as Intermediate wave one, then the pullback to SPX 1041 as Intermediate wave two. From this low we have labeled the current advance as five Minute waves up, and upon completion this advance should end Minor wave 1 of Intermediate wave three. This may sound a bit confusing so we will try to explain. Intermediate wave one, from SPX 1011 to SPX 1129, unfolded in five Minor waves: Minor 1 SPX 1099, Minor 2 SPX 1057, Minor 3 SPX 1129, Minor 4 SPX 1107 and Minor 5 SPX 1129. The pullback from SPX 1129 to SPX 1041 followed to complete Intermediate wave two. Now Intermediate wave three should also take the form of five Minor waves. The first of these five, Minor wave 1 SPX 1041 to SPX 1131 or higher, appears to be completing now. After it does we should get a significant pullback in the area of 3% +/-, and then the next rally which should be Minor wave 3. Currently, this uptrend is beginning to look like Major wave 3 of this bull market. During that uptrend, which took six months Jly09 to Jan10, there were many significant pullbacks as the market worked its way from SPX 869 to SPX 1150. The current wave structure suggests this uptrend, Major wave 1 of Primary wave III, could possibly take about as long to unfold and travel about as many SPX points, (280). This suggests a potential rally into Jan11 completing around the OEW 1291 pivot. This is just an estimation at this stage of the uptrend. Our original estimates in early July suggested two possible upside targets: the OEW 1187 pivot and the OEW 1291 pivot. We were expecting a timeframe more in line with three months than six months. Let's see how it unfolds.
SHORT TERM
Support for the SPX remains at 1107 and then 1090, with resistance at 1136 and then 1146. Short term momentum has not entered an oversold condition since the end of August, and is displaying a large negative divergence. As noted above, we can now count five Minute waves from the SPX 1041 low. This suggests the potential for a more significant pullback, than the recent 14 and 12 points, is gaining in probability. Several technical factors are also leaning in this direction. First, the large negative divergence already noted; second, the overbought condition on the daily charts; and third, the OEW 1136 pivot which has provided resistance since June. Should the SPX drop much below 1120 next week this would suggerst the pullback is underway. On the positive side, should this rally break through the 1136 pivot range it could extend this wave. On the downside, should a pullback break through the 1107 pivot it should find support at the 1090 pivot. If that fails, we will likely need to retest the OEW 1041 pivot or lower.
FOREIGN MARKETS
Asian markets were mostly higher gaining 2.2% on the week. The laggard was China's SSEC -2.4% which is threatening a downtrend.
European markets were mostly marginally lower losing 0.6% on the week. All these indices remain in uptrends.
The Commodity equity group was mixed for a loss of 0.1%.
Europe, the Commodity group and China were soft this week despite gains in the other exporters and the US.
COMMODITIES
Bonds gained 0.7% on the week after hitting a short term high of 2.83% on monday. Still appears yields will head higher medium term.
Crude declined for most of the week losing 3.1%. Its downtrend continues.
Gold soared to record highs this week up 2.3%. Its uptrend continues.
The USD lost 1.6% on the week as it failed to continue its recent rally. Still in downtrend mode.
NEXT WEEK
Monday kicks off FED week with the NAHB (homebuilders) at 10:00. Tuesday Housing starts and Building permits and the FED has a one day FOMC meeting. Then on thursday the weekly Jobless claims, Existing home sales and the BEA leading indicators. Friday closes out the week with Durable goods orders and New homes sales. Expectations for housing remain bouncing along the bottom. After the FED releases its statement around 2:00 on tuesday, an important one btw [by the way], there are two speeches scheduled for friday. The first, from FED governor Duke at the FED, then second from FED chairman Bernanke at Princeton after the close. Best to your week, and trading!
CHARTS: http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1606987
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