weekend update

REVIEW

A new year, a new president, but same old economic problems. In the US the economic reports for the week were about as expected: higher unemployment claims, and lower housing starts. On tuesday Obama was sworn in as the 44th president. We wish him well. The stock market opened on tuesday at SPX 847, and sold off to SPX 804 after the inauguration. Oddly enough, it spent the next three days within tuesday’s range. For the week the SPX/DOW were -2.3%, and the NDX/NAZ -2.7%. Bonds were -2.1%, Crude +9.6%, Gold +6.9% and the Euro -2.3%. Many of the US and Foreign indices confirmed downtrends, (new waves).

LONG TERM: bear market

For the past year we have been maintaining our primary count on the SPX charts, while maintaining a potential alternate count on the DOW charts. Since bear markets unfold in a series of ABC’s, unlike the impulse 1-2-3-4-5 waves of bull markets, our initial assumption was to label all waves as abc’s. One of the rules of OEW is to start with the obvious count, and then let the market force a change. This wave count and approach worked well for most of 2008, except for the severity of the downtrend between August and November. It kept us in the bear market camp throughout 2008, but one of the anticipated bear market rallies (September) sold off before it was confirmed as an uptrend wave. Yet all other waves unfolded as expected. Near the SPX 741 November low we anticipated a strong rally, one that could retrace nearly 50% of the entire bear market. In the first week of January the SPX hit 944, a 27.4% gain, and the market started to pullback. This pullback went further than expected when it broke through the SPX 848 pivot, alerting us to potential problems ahead, as noted in the recent daily updates. In the 50% retracement scenario we were not expecting a pullback this large, nor a trend reversal in the middle of the rally. A downtrend has already been confirmed in many indices. As a result, this market may be forcing a change from the primary SPX count to the alternate DOW count. The difference between the two counts is subtle, but important in tracking the waves of the overall bear market. The SPX abc count suggests a series of abc’s which should have ended Primary wave A at the November low. The DOW abc count suggests a simple 5-3-5 zigzag with the fifth wave of the last 5 underway now before Primary A ends. The overall bear market count does not change with either count, as we are expecting a very large ABC consisting of three Primary waves. Either count, SPX or DOW, suggests the market either completed primary A or will complete Primary A at the conclusion of this downtrend. Bear markets are far more difficult to track due to the potential complexity of bear (corrective) market patterns. Regardless of the outcome to the shorter term counts, we do not expect this bear market to end until 2010.

MEDIUM TERM: downtrend

Earlier in the month we noted that the banking and financial sectors were begining to breakdown again. These two sectors have been leading the bear market after they topped in early/mid 2007. About a week and a half ago the KBE banking sector confirmed a downtrend. Then the XLF financial sector followed, along with the TRAN and a couple of foreign indices. Since then many of the US indices, and nearly all of the foreign indices have confirmed downtrends as well. This is not a good sign medium term. Earlier in the week we set two parameters for traders. A breakout above the SPX 848 pivot would be positive, and a breakdown below the SPX 804 low would be negative. Since then the market has stayed precisely in between these two levels right into friday’s close at SPX 832. Reviewing some of our other indicators suggests that volatility is again increasing (a negative), and the put/call ratio suggests traders are too bullish (a negative). When everything is summed up it suggests that this market is headed for new bear market lows. This increases the probabilities of the DOW count. Suggest you review both counts on the first page of the link below. Then scroll through the rest of the charts to review the various indices and technical indicators. When the market is in a downtrend, as it is now, caution is advised.

SHORT TERM:

Support for the SPX remains at 789 and then 768, with resistance at 848 and then 912. These are the long term pivots. Short term momentum was overbought at friday’s highs and pulled back some. We noted during the week that a rally over the 848 pivot would be a positive, and a drop below the recent 804 low a negative. Reviewing the very short term charts we see significant resistance in the SPX 857-858 area. This level acted as support four times during the second half of December, and has already provided resistance during this downtrend on January 16th. The market will certainly need to clear this level on the upside to generate upside momentum. If you’re bearish it looks like a good place to sell with a tight stop. If bullish, I’d wait until the market breaks through this level on the upside.

FOREIGN MARKETS

The Asian markets were mostly lower this week, and nearly all five indices we follow are in downtrends except China.

The European markets lost about 3.4%, the DAX is in a downtrend and the FTSE is certainly weak.

The Commodity equity markets lost about 3.2% this week. Both are weak, but neither are in confirmed downtrends.

COMMODITIES

Bonds (10YR) traded lower all week -2.1%, and should be heading to around the 120-121 level as their downtrend continues.

Crude rallied 9.6% this week as it moves up into resistance at the $50 level.

Gold broke through overhead resistance and rallied 6.9% on the week. Its uptrend continues.

The currencies again were quite volatile early in the week, as the USD continues to rally while the Euro declines.

NEXT WEEK

Existing home sales and Leading indicators kick off a busy week on monday. On tuesday Case-Shiller updates home prices and a Consumer sentiment reading. The FED starts a two-day FOMC meeting on tuesday, and will release a statement on wednesday. Thursday the weekly Unemployment claims, Durable goods and New home sales. Then on friday the first report on Q4 GDP, Wages, the Chicago PMI and another Consumer sentiment reading. Could be quite a volatile week as many are expecting Q4 GDP at a negative 5% reading. Best to your week!

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