weekend update

REVIEW

Quite an interesting week. The week started off by making new downtrend lows on monday at SPX 1267. Then the market bounced, from an extremely oversold short term condition and a positive divergence on the daily charts. The bounce then turned into a rally. And, the rally then turned into the best one since the beginning of the last uptrend. After all was said and done the US market ended with impressive gains for the week: SPX/DOW +3.65%, and the NDX/NAZ +4.05%. Asian markets gained 0.1%, European market rose 3.8%, and the DJ World index gained 2.8%. On the economic front it was a quiet week with positive reports outpacing negative ones 6 to 4. On the uptick: ISM services, wholesale inventories, the monetary base and WLEI, plus the trade deficit and weekly jobless claims improved. On the downtick: factory orders, productivity, consumer credit and the M1-multiplier. Overall it was the best performance for the US stock market since December 2011.

LONG TERM: bull market

We are still bullish on the US stock market despite the ongoing turmoil in many of the foreign stock markets. Eighteen of the twenty international indices we track are displaying net outflows with our Smart Money indicator. Only the US remains positive, and Indonesia is holding at neutral. This bull market is definitely climbing a wall of worry.

Our weekly indicators remain is a positive mode. With the RSI not getting too oversold during downtrends, with the exception of Q2/Q3 2011, and extremely overbought during some uptrends. The MACD has remained consistently above neutral except for that same period. The wave count from the March 2009 bear market low at SPX 667 continues to progress in a bullish fashion. We have been expecting this bull market to take about four years to unfold, and to complete five Primary waves. Primary waves I and II completed in Apr11 and Oct11 at SPX 1371 and 1075 respectively. Primary wave III has been under since then. Overall we have been expecting a bull market high between SPX 1545 and 1586 some time in 2013. With the recent high SPX 1422, this certainly looks achievable.

MEDIUM TERM: uptrend may be underway

After the October 2011 Primary wave II low, in all four major indices, we had an uptrend into late October, a downtrend into November, then an extended uptrend into early April. These trends are the significant waves of the market unfolding. When the market hit the early April 2012 high the DOW reversed and confirmed a downtrend, while the other three indices, SPX/NAZ/NDX, did not. Then the DOW reversed again confirming an uptrend which ended in early May. In the meantime the other three majors not only failed to display these trends but also failed to make a new high in early May. This series of relative divergences preceded the recent 10.2% decline in the SPX.

This type of intra-market divergence has not occurred since 2004. Then the DOW was the underperformer, making a new correction low during a downtrend, while the other three majors did not. The DOW then underperformed the other three indices for more than 18 months. This time around the DOW is the outperformer, as it made a higher high during an uptrend while the other three majors did not. This suggests the DOW is likely to outperform the SPX/NAZ/NDX for the remainder of the bull market.

From an OEW perspective this recent series of trend reversals by the DOW created a new set of possibilities. However, the DOW has proven to this analyst, time and time again, it is the important index to track. We believe the DOW is displaying to us an important pattern that the others are not. From the October 2011 low we can count five waves up into the DOW’s May 2012 high. This looks like the completion of Major wave 1, of Primary III.

There are some compelling bull market fibonacci relationships when applying this count. During Primary I: Major 1 subdivided into five distinct Intermediate waves while Major waves 3 and 5 did not. Major wave 3 was nearly 0.618 Major 1, then Major 5 did just enough to end the five wave Primary I structure. Using this count Major wave 1 of Primary III also has subdivided into five distinct Intermediate waves, and is almost exactly 0.618 times Major 1 of Primary I. As you can observe there are several interlocking fibonacci relationships in this wave pattern.

To make this pattern fit in the SPX/NAZ/NDX we would need the count the April high as the end of Intermediate wave iii. Then the April decline Int. wave iv and the May rally a failed fifth Int. wave v. All four major indices entered correction mode at that point.

Another possibility, and probably favored by most, is the alternate count posted on the SPX daily chart. Major waves 1 and 2 ended in November 2011, and only Intermediate wave i ended in April. The DOW, under this scenario, would have entered an irregular abc correction after the April high. We see this as a lower probability count. Unfortunately we will need to keep both these counts active until the market provides some additional wave structure information.

SHORT TERM

Support for the SPX is at the OEW 1313 and 1303 pivots, with resistance at the 1363 and 1372 pivots. Short term momentum ended the week slightly overbought. The short term OEW charts remain on a positive bias from just under SPX 1300, with the negative swing point now around 1308.

This week the market generated its first WROC buy signal in seven months. These signals, there have been 27 of them since 2008, have a 90% accuracy rate. When they occur they almost always precede an uptrend confirmation by OEW, suggesting a new uptrend is underway. This would imply, under our preferred count, Major wave 3 of Primary wave III is underway. Our target for Major wave 3, based on the current wave structure, would suggest the SPX should reach the 1499 pivot in the next few months. In order to get there the market is likely going to need some sort of catalyst. We believe this will be QE 3. Based upon what we have been able to gather: a $200 bln – $400 bln program may be initiated at the June FOMC meeting on the 19th and 20th. This is not a given, just rumors at this point.

Short term the market made a low at SPX 1267 on monday and then had its best rally in several months. On thursday the SPX hit 1329, for a 62 point gain without any significant pullbacks along the way. On friday the SPX hit 1308, its first significant pullback since the rally began. After that low, quite early in the day, the SPX rallied to a 1326 close. We are labeling this first rally and pullback as Minor waves 1 and 2, of Intermediate wave i, of the uptrend Major wave 3.

Short term support is at the OEW 1313 and 1303 pivots, with resistance at SPX 1328/35 and then 1342/47. Once these two levels are cleared resistance would occur at the 1363, 1372 and 1386 pivots. Short term momentum is only slightly overbought, and the market would appear to have an opportunity for further gains before any significant pullback. It would also appear the OEW 1363 pivot would be a good target for the potential Minor wave 3.

Should the market decline instead. A retest of the recent low at SPX 1308, and/or the 1303 pivot would be quite normal. But if the decline hit the OEW 1291 pivot and broke through its range, this potential new uptrend scenario could be in trouble. Best to your trading!

FOREIGN MARKETS

The Asian markets were quite mixed on the week for a net gain of only 0.1%. India gained 4.7% while China lost 3.9%, offsetting each other in the tally. No confirmed uptrends yet.

The European markets were all higher for a gain of 3.8%. Spain gained 8.0%, and Italy 5.5% outperforming the averages. No confirmed uptrends yet here as well.

The Commodity equity group gained 2.6%. Russia gained 4.8%.

The DJ World index gained 2.8%. No confirmed uptrend here either.

COMMODITIES

Bonds spiked to a new all time low in yield last friday on both the 10yr and 30yr. This week yields rose as bonds lost 1.6%.

Crude remains as volatile as ever, hitting a new downtrend low on monday at $81.21. But it gained 1.6% on the week.

Gold also had a volatile week after last friday’s $60 gain. It looks like it may have bottomed at the May $1527 low, and the recent activity was a 1-2 coming off that low. Gold lost 1.7% on the week.

The USD declined 0.5% this week after hitting an uptrend high of DXY 83.54 last friday. A negative divergence at extremely overbought levels suggests the uptrend may have ended.

NEXT WEEK

A somewhat busy economic calendar next week kicks off on tuesday with Export/Import prices and the Budget deficit. On wednesday, Retail sales, the PPI and Business inventories. Thursday we have weekly Jobless claims, and the CPI. Then on friday, the NY FED, Industrial production and Consumer sentiment. On tuesday FED governor Tarullo gives a speech at the San Francisco FED at 11:30. Best to your weekend and week!

CHARTS: http://stockcharts.com/public/1269446/tenpp