After another volatile week, the stock indices managed to gain slightly: SPX +0.1%, DOW +0.4%, and the NDX/NAZ +0.6%. The economic reports were mixed: housing continues to slump, core inflation remains at the 2% level, and the FED held key lending rates unchanged. Bonds rose 0.2%, Crude gained 0.7%, Gold lost 1.1%, and the Euro was up 0.5%. The ongoing theme of driving up the Techs, when the Cyclicals start to weaken continues. This week, when the SPX made a new 2-month intraday low, the Techs rallied and a correction was averted again. Bull markets can certainly be relentless at times, as they climb the "wall of worry".
LONG TERM: bullish
The October 2002 bull market continues. Currently from the Oct. 10, 2002 print low the NDX/NAZ are up 125%, the SPX is up 85%, and the DOW is up nearly 80%. For an economy the size of the U.S. those are good returns. During late 2002, as stock index patterns were completing, and our MMI cycle was concluding, 90% of NYSE stocks were trading under their 200 day moving average. This is when our OEW analysis indicated an end to the bear market was near, and a new cyclical bull market would begin. OEW has remained bullish ever since. The bull market has unfolded in five Primary waves, as anticipated. Primary waves one thorugh four completed in August 2004, and an extending Primary wave five has been ongoing ever since. Primary waves subdivide into five Major waves, with each Major wave subdividing into five Intermediate waves, then the subdivisions continue to Minor, Minute, etc. This is how a bull market unfolds. One rally building upon another, and one uptrend building upon another. Until the last wave of the last uptrend completes. Thus far, this last Primary wave completed Major waves one and two in April 2005, and Major wave three has been underway ever since. Major wave three has completed Intermediate waves one through four in March 2007, and the uptrend from that low is Intermediate wave five. When OEW confirms a downtrend reversal, Intermediate wave five and therefore Major wave three will have completed. The ensuing correction, Major wave 4 should at least fully retrace the entire uptrend from March 2007, and possibly more. This would be the largest correction since 2003, and likely create the last best buying opportunity for the bull market. After this upcoming correction, Major wave five should kick off, in five distinct Intermediate waves. Carrying the bull market to an anticipated top around SPX 1700 by mid to late 2008. Still a ways to go!
MEDIUM TERM: neutral
When the SPX reached 1532 in late May, we turned neutral medium term, in anticipation of the upcoming correction. Since then the SPX has only managed to reach a high of 1540, and has made a series of successive lower lows with 1483 being the most recent this week. Every time that the SPX/DOW have started to falter the NDX/NAZ has rallied. The Techs have been in a steady uptrend of successive higher lows since the March Intermediate wave four bottom. If you recall, during the last uptrend the Techs were faltering and the Cyclicals kept making higher highs. Then when the Cyclicals topped the entire market corrected quite abruptly. It just the opposite during this uptrend. Therefore, we have started tracking the NDX/NAZ quite closely in recent weeks, looking for a potential top in their uptrend. Currently, there is a potential fifth wave diagonal triangle forming. These are terminating wave structures, that upon conclusion, often lead to abrupt selloffs and uptrend reversals. There is also a possibility that the NDX/NAZ will continue to support this market as it trends higher. Next week, a holiday shortened week, the market will need to decide if it has gone to far too fast and correct. Diagonal triangles often occur in those situations. Or it’s ready to move higher after some consolidation in the Cyclicals. Holidays, historically, are trend reversal opportunities. Last Thanksgiving the NDX/NAZ reversed their uptrend, and around this February’s Presidents Day, the entire market reversed its uptrend. Decision time!
The potential diagonal triangle in the NDX/NAZ is the primary focus at this point short term. While the SPX/DOW have been tracing out ABC’s for a few weeks now, the NDX/NAZ have been forming this terminating rising wedge. The current trend line parameters for the wedge are being kept at 1900 and 1965, but the wedge is narrowing to 1905 and 1955 at this time. Ideally, one more rally to new highs in the NDX/NAZ should conclude this formation. However, if the lower support line is broken, a drop below NDX 1900, it may have made the top on friday. Or, if during the rally to new highs, the NDX/NAZ bust right through the upper trendline and keep rising, this uptrend should be extending in all indices. It’s an important juncture for the entire market, and possibly worldwide as well.
The Asian markets all appear to have similar double top patterns, and China’s SSEC has already started lower. If the U.S. does correct shortly, these indices should follow.
The European markets both managed to make new highs in June. However, Germany’s DAX could be forming a diagonal triangle like the NDX/NAZ, and the FTSE appears to be in some sort of corrective pattern like the SPX/DOW.
Bonds have been quite volatile of late after a major selloff. The downtrend seems to be reversing for now however.
Crude continue to move higher in a corrective pattern. It has already retraced nearly 70% of it decline in the past six months.
Gold continues to downtrend, and could break hard down when the market corrects.
Euro is at an interesting juncture. Thus far it has had a minimal correction and seems to be trying to uptrend again.
Enjoy your weekend. Next week could be quite interesting.