weekend update

REVIEW

Economic reports for the week continue to display a moderation in the decline in economic activity. Case-Shiller home prices were reported at -18.7% v -18.6%, Existing home sales 4.68 mln v 4.55 mln, and New home sales 352K v 351K. Q1 GDP was revised upward but still sharply negative, -5.7% v -6.1%, the Chicago PMI was 34.9% v 40.1%, and the weekly Jobless claims were 623K v 631K. Consumer confidence jumped on one reading 54.9% v 40.8%, but was only moderately higher on a another 68.7% v 67.9%. The economy is no longer in free fall. But with home prices continuing to decline, and jobless claims remaining over 600K, it’s not improving either. The equity markets rallied late in the week to post good gains. The SPX/DOW were +3.2%, and the NDX/NAZ +5.1%. Europe was +0.9%, Asia +3.6%, and the Commodity equity market were +4.5%. Overall it was a good week for stocks, commodities and gold, but a bad week for Bonds and the USD.

LONG TERM: bear market

For the past three months the market has staged its best rally of the entire bear market in terms of price (+263 points) and percentage (+39%). It was expected. In fact, at the March 2009 low (SPX 667) we originally expected a rally to SPX 1107. This target was later lowered to a range between SPX 1001 (a 50% rally) and SPX 1107 (a 50% retracement). The reason for this projection was the current wave structure and historical wave relationships in cyclical bear markets. Historically bear markets have unfolded in ABC patterns. They are corrective in nature, not impulsive like bull markets. In Supercycle/Cyclical bear markets the ABC pattern is comprised of three Primary waves. When the first down wave, Primary wave A ends, it has typically been followed by a strong counter trend Primary wave B rally. This rally usually retraces either 50% of the entire decline, or rallies 50% from the lows. When Primary wave B concludes, the often dreaded Primary wave C takes the market lower to end the bear market. 

MEDIUM TERM: uptrend, but cautious

From the October 2007 high (SPX 1576) to the March 2009 low (SPX 667) the market declined in three Major waves. The three Major waves, (Mar08 SPX 1257, May08 SPX 1440, and Mar09 SPX 667) completed Primary wave A. Each of the declining Major waves, A and C, were comprised of five Intermediate waves. In basic Elliott Wave terms this was a simple 5-3-5 zigzag. When the market bottomed in March at SPX 667 and then started to edge higher, we acknowledged the completed wave pattern and projected the above target(s). Now that the market has rallied 39% from the lows and appears to be stalling, we posted a cautionary note in last weekends update. Thus far the uptrend has not violated any important support levels. But it has remained in a narrow trading range (SPX 879 – 930) for nearly the entire month. During the bear market this type of consolidation, after an uptrend, has often led to a reversal within the first week of the following month. We remain cautious medium term, and bearish long term.

SHORT TERM:

Support for the SPX is at 912 and then 848, with resistance at 935 and then 961. Short term momentum was slightly overbought at the close on friday. With the lengthy consolidation, and the constant successful retesting of SPX 880 for the past three weeks. We can now see a potential count for moderate new highs. Intermediate wave 4 may have just completed a flat, alternating with the Intermediate wave 2 zigzag. The fibonacci resistance zones, posted a few weeks ago remain in play: SPX 937 – 946, SPX 975 – 982 and SPX 1034 – 1049. The key level to watch on the downside is SPX 876. The market has successfully dodged this level this far. When it fails to do so the uptrend will most likely be over. 

FOREIGN MARKETS

Asian markets rallied 3.6% on the week. All remain in uptrends with India and Hong Kong the week’s best performers.

European markets lagged +0.9%. Their uptrends continue with Germany leading.

Commodity equity markets rallied 4.5%. Both Canada and leader Brazil remain in uptrends.

COMMODITIES

Bonds lost 0.5% this week and remain in a downtrend with rates rising. The evidence is now convincing that Bonds have entered a new Cyclical bear market. This is quite a reversal considering that Bonds had been in a Cyclical bull market for nearly three decades. Bearish on Bonds long term and medium term.

Crude rallied 7.5% on the week as its uptrend continues. Still expecting Crude to retest its lows later this year.

Gold gained 2.3% on the week and is now approaching the $1,000 level again. Uptrend remains intact in this long term bull market.

The USD broke to new downtrend lows -0.9% on the week. The USD is now again in a bear market. The Euro (+1.2%) and Yen (-0.7%) uptrends remain intact.

NEXT WEEK

Economic schedule unavailable. FED chairman Bernanke testifies before Congress on wednesday at 10:00. Then on thursday Bernanke gives a speech at the FED headquarters at 8:45. Expecting non-farm payrolls to be released on friday. Will update with the economic schedule on monday. Best to your week!

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