Thursday's Objective Elliott Wave update on equity markets by Tony Caldaro

the ELLIOTT WAVE lives on
Market analysis using proprietary Objective Elliott Wave techniques

Tony Caldaro - May 21
thursday update

SHORT TERM: market pullback continues, DOW -130
Overnight the Asian markets were all lower. Europe opened lower and closed -2.70%. US index futures were lower overnight and at 8:30 the weekly Jobless claims were reported at 631K v 643K. At the open the market gapped down to SPX 896, it closed at 903 yesterday. At 10:00 Leading indicators were +1.0% v -0.2%, and the Philly FED -22.6% v -24.4%. The market continued lower until it hit SPX 884 at 11:00. The market started to rally but could only manage to gain seven points over the next two hours. Another pullback followed and the SPX retested Friday's low when it hit 880 at 3:00. A rally attempt in the last hour was the best of the day as the SPX managed a push to 889. For the day the SPX/DOW were -1.60%, and the NDX/NAZ were -1.90%. Bonds were down over one point, Crude slipped $1.00, Gold rallied $16.00, and the Euro was higher. Support for the SPX remains at 848 and then 789, with resistance at 912 and then 935. Short term momentum was oversold for most of the day and moved higher into the close. Tomorrow, only a speech from FED chairman Bernanke at 2:00.

Today's selling was a bit more than expected. The SPX held the recent 879 low, when it hit 880 at 3:00, and then rallied into the close. Was not expecting a full retracement of the recent SPX 879-925 rally. In reviewing the charts I noticed that the DOW made a new uptrend high yesterday while the SPX did not. Neither did the Techs for that matter, and certainly not the Financials. The DOW new high could have marked the end of Intermediate wave five, as it satisfies the minimum requirement for a fifth wave.

I then took a closer look at the Financials. The three financial indices we have been following are the XLF, KBE and KRE. While the XLF and KBE have displayed weakness, the KRE is already in a downtrend. Not exactly what one would expect if this market is going to go much higher. When the financials start breaking down, the general market usually follows shortly thereafter.

We've had a big rally (39%) from the March lows, the best one of this bear market. There's lots of bullish talk of "greenshoots" appearing in the economy. And, the market was the most overbought it has been in the entire bear market at the recent highs. Knowing what comes next in the long term picture after this uptrend ends: Primary wave C. It's certainly time to start getting cautious on this market. Last week we used SPX 876 as an important level to define Intermediate wave 4. It now looks like it might decide whether or not this uptrend will continue. That appears to be the line in the sand. Best to your trading!

MEDIUM TERM: uptrend, but cautious

LONG TERM: bear market

CHARTS: http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1606987