Objective Elliott Wave perspective on what looks like rally top and what it probably means: Tony Caldaro's weekend update

When the markets reached a high this past week and dropped back, it started to look like the "B" wave top completed. What's a "B" wave top? If you've been following Tony Caldaro in his Objective Elliott Wave methods, you understand. While there are various Elliott Wave analysts about, we like to reference Tony's good work. So as usual, here's his weekend update from his Objective Elliott Wave site (links here and below, and always at right). Once we've confirmed a top is in, attention will turn to what are the downside targets? At that point, if you're a KISS investor you might prefer to stay in cash or a simple short-side investment and ignore the daily and weekly down-and-up waves until an identifiable low is confirmed. Others may want to do the same with part of the portfolio, then trade more actively with another part of it. Just be aware it can be more tricky at times. One goal is to see when the SPX may complete a wave 2 up, then trigger the short for a wave 3 down. But let's not get ahead of ourselves right now. For one thing, we need to understand whether we can confirm the "B" wave top is completed, or not. (I'm thinking the idea is to use SPX as a dividing-line level to decide that; remaining under that suggesting it's done, above would imply it isn't.) Let's see what Tony Caldaro is saying in his weekend update:
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the ELLIOTT WAVE lives on
Market analysis using proprietary Objective Elliott Wave techniques
by Tony Caldaro

November 21
weekend update

REVIEW

The markets rallied on monday, after another sunday night of USD selling. Then turned flat to lower as the week unfolded. On the economic front, the Philly FED turned higher, along with capacity utilization, retail sales improved but ex-autos they were lower. On the downside were the Empire index, inventories, industrial production, housing starts/permits and leading indicators. Weekly jobless claims edged higher, as did the PPI and CPI. The FED announced they are going to roll back discount window borrowing from 90 days to 30 day as of January 2010. For the week the SPX/DOW were mixed and the NDX/NAZ were -1.2%. Asian markets (+0.3%) were mixed, European markets were all lower (-1.2%) but the Commodity equity markets were higher (+1.6%). Bonds gained 0.5%, Crude added 0.6%, Gold was +2.8% and even the USD index was higher (+0.5%). Home prices/sales, consumer spending, the Q3 GDP revision and FOMC minutes highlight the upcoming holiday week.

LONG TERM: bear market rally
After the bull market ended in Oct 2007 the stock market declined for the next seventeen months, until Mar 2009. The total market loss for the SPX was 58% and the DOW 54%. As of monday/wednesday, when the SPX/DOW were making new recovery highs, the SPX had retraced 49% of that the decline, and the DOW 51%. We projected the potential for this type of bear market rally in early March when the SPX was trading in the low 700's. Below we have posted a chart of the DOW from 1929 to present. We plotted it on a log2 scale so that each box represents either a doubling or a 50% loss depending upon the trend. Notice during this time period there have only been four instances when the DOW has lost about 50% or more of market value: 1929-32, 1937-42, 1973-74 and 2007-09. In OEW terms these types of events are generally considered cycle waves. The exception, of course, is the 1929 cycle wave [5] top and the 2007 cycle wave [5] top. When the fifth cycle wave completes a Supercycle bull market, a supercycle bear market follows. Next observe Cycle waves [1] through [4]. Notice that cycle wave [2] formed a double bottom (flat) and cycle wave [4] only a single bottom (zigzag). This is the rule of alternation: corrective waves of similar degree should alternate in wave structure. Throughout the entire 1932-2007 Supercycle bull market the rule of alternation applied. From the cycles waves labeled on the chart, to the Primary waves, Major waves, Intermediate waves and all waves of a lesser degree, not shown. When we take this rule of alternation one degree higher, from cycle wave to supercycle wave, it should also apply. Therefore it would make sense that the current supercycle bear market should form a double bottom (flat) to alternate with the single bottom (zigzag) of 1929-32.

Next observe after each 50% market value decline there was always, at least, a 50% retracement rally. The 1973-74 cycle wave [4] zigzag bottom naturally never revisted the lows again. The 1937-42 cycle wave [2] retraced 64% of the initial decline before turning over and heading back to the lows. During the 1929-32 supercycle bear market, the stock market lost 50% of its value in 1929, retraced 53% of that decline into 1930, before turning over to make substantial lower lows. Notice all three previous events had different outcomes. Yet, each experienced approximately a 50% total market loss, and then a 50% or more retracement rally. This is the exact reason why we projected a 50% retracement rally from the Mar 2009 SPX 667 low. History does repeat itself, but not in the exact same way.

If we next examine the time factor for each of these cycle type waves. We find that the two zigzags, (single bottoms), took between 23 months (1973-74) and 34 months (1929-32). While the 1937-42 flat, (double bottom), took 61 months. This is quite long compared to the other two cycle type waves. Naturally, since the flat wave structure is a double bottom, it takes longer to unfold than a single bottom zigzag. But something else occurred during cycle wave [2] that did not occur during the other two cycle type waves: the start of World War II. When we examine the 1937-1942 time period we find Germany invaded Poland in 1939. Then in 1940 Germany invaded France, and the Axis of Powers was formed between Germany, Italy and Japan. In 1941 Japan attacked Pearl Harbor which resulted in the USA entering the world war in 1942, the year cycle wave [2] ended. It is likely that the uncertainty of world war II extended this cycle wave. If this assumption is correct, then the current Supercycle wave should last about three years, and not five. In summary, we can conclude that the current Supercycle bear market should take the form of a flat, double bottom. The 58% total market loss was Wave A of this flat and it bottomed in Mar 2009 at SPX 667. The current 49% bear market retracement rally is wave B. Then upon conclusion of wave B, the final leg down to complete the C wave flat should bottom in 2010 with a retest of SPX 667. The year 2010 also coincides with the 4 year cycle low.

MEDIUM TERM: uptrend
We just examined the most probable outcome based on the very long term picture: 1929-2009. Now let's review the current Supercycle bear market from Oct 2007 and SPX 1576. The 58% market loss in the SPX took seventeen months unfold and this was in the form of a detailed zigzag: 5-3-5. You can review this wave structure on the SPX weekly chart using the link below. We labeled the first five waves down Major wave A, the three Major B and the second five waves down Major C. This completed Primary wave A at SPX 667. Since then, Mar 2009, the market has again rallied in three Major waves. Major wave A ended in Jun at SPX 956, Major B in July at SPX 869 and Major C hit SPX 1114 this week, for a 49% retracement of Primary wave A. When Primary wave B concludes, the SPX should decline in a five wave structure to complete a flat (3-3-5), or a complex structure taking the form of a flat (3-3-3).

We have decided to begin the labeling of a Primary wave C with a five wave structure, five Major waves, when the next downtrend is confirmed by OEW. Since Primary wave A was clearly a three, and Primary B a three, Primary C should be a five to complete the EW classic 3-3-5 flat.

In early Mar 2009, when Primary wave A appeared to completing. We projected a 50% Primary wave B retracement rally that should end between the two long term OEW pivots: SPX 1107 and SPX 1179. This week the SPX hit 1114. Just above the level of the 1107 pivot, but still within the historical range of pivots in general. During this Primary wave B we have repeatedly noted, that every uptrend during the entire bear market has ended at a long term pivot. Since there are only six long term pivots between SPX 961 and 1530, and there have been six completed uptrends, this is quite an amazing phenomenon. Therefore, we continue to stress the importance of this long term pivot at SPX 1107. Thus far the SPX challenged it during the October rally, which ended at 1101. Then after a sharp pullback to SPX 1029, the SPX has again challenged it during this rally. Should the market break through this pivot, the next one is at SPX 1179.

SHORT TERM: Support for the SPX is at 1090 and then 1061, with resistance at 1107 and then 1133. Short term momentum rose to neutral after being slightly oversold at friday's low. This Major wave C uptrend has exhibited nine distinct waves. The labeling of these waves is noted on the SPX and DOW daily charts in the link below. Every time the RSI has hit oversold on the daily chart the market has rallied. This did not occur during Major wave A. It did not hit a daily oversold level during the entire uptrend. Clearly the Major wave A uptrend was much stronger than this Major wave C uptrend. When this "buying the dips" pattern changes we can be fairly certain that Primary wave B has ended.

Currently we have counted five waves up from the early November SPX 1029 low: wave 1 SPX 1061, wave 2 SPX 1045, wave 3 SPX 1105, wave 4 SPX 1085 and wave 5 SPX 1114 (1111). This rally looks very similar to all the other rallies during this uptrend: a strong first or third wave, then a weak fifth. We have also observed the usual negative RSI divergence at the SPX 1114 high, and then a small five waves down to 1087. SPX 1100, which is within the range of the 1107 pivot, should offer resistance. The pivot at SPX 1090 is currently support. A break below this support pivot should continue the downside momentum.

One last observation. During this recent extension of the Major wave C uptrend several sectors have remained in downtrends, and NYSE breadth has failed to make a new high. These sectors include; HGX, KBE, KRE, R2K SOX, XLF and XLU. Also, five foreign indices remain in downtrends: ASX, BSE, DAX, EUR50 and the NIKK. The USA uptrend is not only exhibiting internal weakness, but this is spreading worldwide. Best to your trading!

FOREIGN MARKETS: The Asian markets were mixed but were +0.3%. Of the five we follow only the HSI and SSEC made higher highs.
The European market were all lower and were -1.2%. Of these five only the FTSE and IBEX made higher highs.
The Commodity equity markets were all higher gaining 1.6% on the week. Every one of three we follow made higher highs.

COMMODITIES: Bond prices continues to edge higher gaining 0.5% on the week. The 1YR hit new multi-year lows in yield this week, and the 3MTH retested the 0.05% yield low.
Crude gained 0.6% on the week while weakening on thursday/friday. Still in an uptrend, but has not made a higher high since October.
Gold continued to made new all time highs, +2.8% on the week. Uptrends in Gold and Silver continue, as Silver extended on monday.
The USD index gained 0.5% this week. The EUR lost 0.3% verses the USD, while the JPY gained 0.9%. Trends remain the same.

NEXT WEEK: Monday kicks off the week with Existing home sales at 10:00. On tuesday, Q3 GDP revision, Case-Shiller home prices, Consumer confidence and then the government's FHFA home prices. This should make for an easy comparison between public and private statistics. Also on tuesday the FOMC minutes will be released. On wednesday, the weekly Jobless claims (thursday is a holiday), Consumer spending/income, Durable goods, Consumer sentiment and New home sales. Thursday is a national holiday, and on friday trading volume will be quite subdued. Best to your week as the holiday season kicks off.
CHARTS: http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1606987