Markets overview and Elliott Wave comments from Tony Caldaro

Here are Tony Caldaro's weekend update comments particularly focused on Elliott Wave in equities, as well as commenting on other markets. (You can find Tony's site in my list at the right side of this page):
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January 31
weekend update
REVIEW

The FED met this week in its regular FOMC meeting. Rates stayed near zero, they noted they may buy Treasuries (monetizing the debt), and they are still looking for a second half recovery. The preliminary report on Q4 GDP was -3.8%, the worse quarterly report since 1982. Many were expecting a much lower number, and it still may be lowered in the weeks ahead. The other economic reports were not much better. Weekly Jobless claims hit a record high, New home sales at record lows, and housing prices continue to fall at an alarming rate. The market started the week with a 3-day rally, and then gave it all back by Friday. For the week the SPX/DOW were -0.8% and the NDX/NAZ were mixed. Bonds lost 1.0%, Crude dropped 10.3%, Gold gained 3.4% and the Euro lost 1.2%.

LONG TERM: bear market
Historically bull and bear markets are not that difficult to identify, when applying OEW. There is a quantitative event that confirms the reversal. In bull markets the waves unfold in five wave structures as they impulse higher within the main trend. In bear markets, however, the wave structures can take many many forms: zigzags, flats, triangles, double threes and even more complex formations. Regardless of the wave structure, a new bull market will be confirmed when a certain OEW quantitative event occurs. This is how the equity market works, and for the most part, all markets. The challenge of labeling each wave within the overall bull/bear market is much easier in bull markets than bear markets, due to their potential complexity. The main thesis of OEW is to take the most obvious count, and then let the market force a change. Bull markets rise in 1-2-3-4-5 patterns, bear markets decline in a-b-c patterns. Subdivisions within these two basic patterns will always occur. With experience some can be anticipated, others can not. Each significant wave within the overall bull/bear market trend is also quantified. It is these significant waves that create the overall patterns, and not, the smaller waves that unfold within these significant waves.

For the past year we have been anticipating a large ABC bear market. The first decline we have been labeling as Primary wave A may have bottomed in November 2008. We can count a complex series of abc's from the 2007 bull market high into that low. This count is posted on the SPX charts [link at Tony's site]. Thus far, the market has not negated that possibility. Another count we have been following, to complete Primary wave A, is a simple abc. This count is posted on the DOW charts [link at Tony's site]. It suggests that a smaller Major wave A completed in March, Major wave B ended in May, and Major wave C is still unfolding. With this count the market will need to make a lower low before Primary wave A ends. With the recent confirmed downtrend in many of the markets indices, this scenario has increased its probabilities.

The importance of identifying a Primary wave A bottom, is that Primary B waves typically retrace about 50% of the entire bear market. Therefore it is one of the most important events to identify in any bear market. For traders it's a good opportunity to go long, and for investors, a good opportunity to exit long positions before Primary wave C unfolds. In a review of historical market data for this type of bear market, Cyclical, the Primary B waves we have observed did not include a trend reversal. Therefore, the probabilites favor lower lows for the stock indices before Primary wave A ends, as labeled in the DOW charts.

MEDIUM TERM: downtrend
Currently, many of the indices we follow are in downtrends. The exceptions are the NDX/NAZ, TSX, BVSP and FTSE. These exceptions are noteworthy in that they generally represent tech stocks and commodities. Recently the tech stocks reported much better than expected earnings. Commodities, however, have been in prolonged downtrends since the summer of 2008. Only recently have they shown any signs of reduced selling pressure. As a result uptrends have been confirmed in the commodity index and most of its sectors. These two sectors, techs and commodities, will be important to watch in the upcoming weeks, as well as banks and the financials. Either the banks/financials will continue to drag the market lower, or the techs/commodities will support the market and then pull it higher. In the meantime we have to stay with what is obvious, and that is the downtrends in the SPX/DOW.

After the recent uptrend peaked at SPX 944 the market steadily sold off to 804 on the 21st. A rally followed to SPX 878 on Wednesday's gap up, this represents about a 50% retracement of the initial decline. On the DOW charts we have labeled the low (804) wave 1 and the recent rally (878) wave 2. The decline on Thursday/Friday to 822 is anticipated to be part of wave 3, as it does appear to be more impulsive than corrective. Should this wave count unfold, as expected, the market should be making new lows in the weeks ahead. Again, as we have mentioned for the past few months, the OEW pivot at SPX 848 remains the key. Any rally above it turns the market short term positive, below is a short term negative.

SHORT TERM
Support for the SPX remains at 789 and then 768, with resistance at 848 and then 912. Short term momentum was quite oversold on Friday with a slight positive divergence on both the hourly and very short term charts. If the financials continue to pressure the market, and drag the tech/commodity sectors with them, this downtrend could get quite nasty. Since wave 1 was 140 points, and wave 2 ended at SPX 878, wave 3 should reach at least SPX 738 or even lower. There are converging Fibonacci relationships, for all the waves in the bear market thus far, at around SPX 600. The key levels to watch here are the 789 and 768 support pivots noted earlier. If the SPX breaks through them the next support is at 741, the November lows. Should the techs/commodities provide support for this downtrend, then the SPX should reverse, breakout above the 848 pivot and again challenge the 912 pivot. Suggest watching the KBE (banking), NDX (tech) and DBC (commodity) indices this week.

FOREIGN MARKETS
All of the Asian markets we follow are in downtrends, yet they all rallied this week an average of 5.7%. The European markets are mixed with the DAX in a downtrend and the FTSE holding its uptrend. They gained 3.1% on the week. The Commodity equity markets, Canada and Brazil, continue to hold onto their uptrends +2.0% on the week.

COMMODITIES
Bonds were -1.0% on the week and remain in a downtrend. But are getting close to support around 121 (10YR). Crude was -10.3% on the week, but has edged into an uptrend for the first time since July. Use close stops. Gold was +3.4% on the week as its uptrend continues. Current resistance in the low $930's, then mid $980's. Currencies remained choppy this week with the Euro -1.2% (downtrending), and the USD +0.4% (uptrending).

NEXT WEEK
Another busy week. The PCE, ISM manufacturing and Construction spending are reported on Monday. Tuesday we have Pending home sales, and Auto sales. The ADP employment index is reported on Wednesday with ISM services. Thursday weekly Unemployment claims and Factory orders. Then on Friday morning the much watched Non-farm payrolls. Nothing much from the FED this week except Foreign exchange rates on Monday, and Consumer credit on Friday.