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the ELLIOTT WAVE lives on
July 21, 2012
weekend update
by Tony Caldaro
REVIEW
Another interesting week. The market started the week by heading lower into early tuesday. Then rallied to new uptrend highs on thursday before pulling back on friday's Opex. Spain's IBEX dropped 5.6% on friday, assisting the SPX pullback, as their 10YR yields pushed over 7% again. Nevertheless, for the week the SPX/DOW were +0.40%, and the NDX/NAZ were +0.95%. Foreign markets were mixed with Asia +0.8%, Europe -1.3%, and the DJ World index +0.5%. Economic reports for the week were split with 7 improving and 7 declining. On the uptick: NY FED, CPI, housing starts, NAHB, industrial production, and the WLEI plus Philly FED improved. On the downtick: retail sales, business inventories, capacity utilization, building permits, weekly jobless claims, existing home sales, and leading indicators. Next week we get reports on housing, durable goods, and Q2 GDP.
LONG TERM: bull market
It has been said, it is easy to be bullish when markets are rising and then to turn bearish when they start to decline. Yet with nearly 85% of the international markets we track in bear markets, and only the US, and possibly England and Switzerland, in long term uptrend ends. How does one easily determine which are rising and which have started declines?
While some of the major US indices, in recent months, have offered mixed signals in their wave patterns. The bellwether DOW continues to track this bull market with clarity and precise waves. Our long term count, from the March 2009 bear market low, remains the same. A multi-year Cycle wave [1] began at that low which should divide into five Primary waves. Primary waves I and II completed at SPX 1371 and 1075 in 2011. Primary wave III has been underway since then. Within each Primary wave there are five Major waves. Notice how Major wave 1 of Primary I subdivided into five Intermediate waves, and Major 1 of Primary III has done likewise. Major wave 3 should now be underway from the SPX 1267 Major wave 2 low. We are anticipating Major 3 will be a multi-month uptrend which may last until year end, and carry the SPX up to the OEW 1499 pivot.
MEDIUM TERM: choppy uptrend
For the past several weeks we have been vacillating back and forth between new bull markets highs ahead or a retest of the SPX 1267 low. We have been observing a choppy type of uptrend from that low, and knew the 2-year Tech cycle low was due soon. This week, tuesday, the SOX index appeared to put in that low.
When one compares the SOX index with the SPX it is easily seen that one does not get very far without the other. When the SOX is rising the SPX rises with it. Yet, when the SOX stalls or heads lower, the SPX goes sideways or declines as well. Notice the action in the SOX/SPX since their coincident June lows. They both started off uptrending, but the SPX became quite choppy when the SOX stalled and started downtrending. So which index is leading the other. The answer to that question depends on the 2-year cycle.
When the 2-year cycle bottoms the SOX takes over leadership, driving specifically the Tech stocks higher and general market, until the upward surge off that low ends. This can take anywhere from 6 – 12 months. Then the general market takes over leadership. Compare the two indices after each 2-year cycle low on their weekly charts from 2002.
After the SOX index bottoms it usually surges about 8+% in a few days. Then it pulls back losing about half of that gain before resuming the new uptrend. Tuesday to thursday's surge was +8.3%, and friday it began its pullback. It's acting like the typical kickoff after a 2-year cycle low.
This would help explain the overall choppiness in the general market during this uptrend. The Tech cycle was bottoming while the Cyclicals were trying to rise. Should the Sox index, semiconductors, start rising as expected the SPX uptrend should start to appear more impulsive. If not, and there is another low ahead. We would then expect the SPX to retest just the late June low at 1309, before resuming the uptrend.
We recently completed a 50 year study on our WROC buy signal. Thank you Alan for the data. These signals usually occur prior to an OEW uptrend confirmation. The latest one occurred in June. Over the entire period 1962-2012 they were accurate nearly 90% of the time. During a bull market their accuracy rises to 96%. We also found, during bull markets WROC buys signals only occurred 11% of the time during B wave uptrends. So the chance of this uptrend being a B wave, of an ongoing Major wave 2 correction, is only 11%.
SHORT TERM
Medium term support for the SPX is now at the 1363 and 1313 pivots, with resistance at the 1372 and 1386 pivots. Short term support is at the 1363 pivot, SPX 1342/47 and 1333/38. Short term resistance is at the OEW 1372 and 1386 pivots, plus SPX 1402/03. Short term momentum ended the week quite oversold.
During the week we upgraded our projections, for this uptrend, based upon the activity in the SOX index. After reviewing the charts this weekend we have also upgraded our labeling on the SPX chart, from Minor and Minute waves 1 and 2, to Intermediate and Minor waves 1 and 2. The rally was SPX 1267-1363 was sufficient for an Intermediate wave i advance, and Intermediate wave iii should now be underway from SPX 1309. Minor wave 1 can be counted from SPX 1309-1375, with Minor 2 at 1325. Minor wave 3, of Int. iii, should be currently underway. The other count we are tracking, if the SOX 2-year low is not in place yet, is posted on the DOW charts.
Should the uptrend resume after this pullback, as expected, we can now project a Minor wave 3 target near SPX 1432 (Minor 3 = 1.62 Minor 1). This nears the range of the OEW 1440 pivot. Then an Intermediate wave iii target near SPX 1464 (Int. iii = 1.62 Int. i). Then an uptrend high for Major wave 3 near SPX 1507 (Int iii-v = 2.0 Int. i). This nears the range of the OEW 1499 pivot. This all depends on how the SOX index responds to its recent low. Best to your trading!
FOREIGN MARKETS
The Asian markets gained 0.8% on the week. All indices, but China, are in uptrends.
The European markets lost 1.3% on the week. Mostly due to declines in Spain and Italy on friday. All indices still uptrending, with the two noted as a possible exception.
The Commodity equity group gained 0.7% on the week. All but Brazil are in uptrends.
The DJ World index is uptrending and gained 0.5% on the week.
COMMODITIES
Bonds remain quite resilient despite the uptrend in stocks and commodities. Still uptrending and gained 0.2% on the week.
Crude continues to uptrend and gained 5.7% on the week.
Gold remains in a choppy uptrend, which has not made a higher high since June, and lost 0.3% on the week.
The USD is still uptrending gaining 0.2% on the week. While the EUR keeps downtrending, losing 0.7% on the week.
NEXT WEEK
Tuesday kicks off the economic week with the FHFA housing price index. On wednesday we'll get New homes sales. Then on thursday weekly Jobless claims, Durable goods orders and Pending home sales. On friday, Q2 GDP (estimates +1.5%) and Consumer sentiment. FED governor Raskin gives a speech monday night, and FED chairman Bernanke gives a speech tuesday morning. The next FOMC meeting is tuesday/wednesday July 31 and August 1st. Best to your weekend and week!
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