The market traded mostly lower for the week before the holiday, and then rallied post holiday on light volume. As a result, the potential diagonal triangle we were observing failed to hold, when the SPX dropped below 1430 on tuesday. For the week the SPX/DOW were -1.35%, and the NDX/NAZ were -1.25%. Bonds made new highs for their uptrend, Crude challenged the $100 century mark, Gold soared and the Euro made new highs. The correction in the stock market continues.
LONG TERM: bullish
Despite all the bearish fundamentals, and the bear market sell signals given by many prominent market analysts, OEW analysis remains bullish. A bull market does not end until a completed OEW wave pattern, and a completed MMI cycle has formed. Neither of these have occurred. The most probable count for the SPX/DOW is the one we have posted in the chart link below. Primary waves 1 – 4 completed in August 2004, and an extended and subdividing Primary wave 5 is still ongoing. Within this Primary wave 5, we have posted Major waves 1 – 2 completing by April 2005. Then a subdivided Major wave 3 completed recently, and Major wave 4 continues to unfold. Under this scenario Major wave 5 will take the market to new highs, after Major wave 4 completes. Obviously this correction has been trickier than the corrections in recent years, similar to the 2004 Primary 4 correction, and early 2005 correction. Both displayed unusual patterns and were accompanied by extreme bearishness. Historically, one needs to go back to 1998, the previous Major wave 4, to observe this sort of fundamental/technical bearishness. We had anticipated this type of negativity during the July-August correction. But it seemed to abort when the FED stepped in with a discount rate cut on options expiration day in August. Now it appears to be unfolding as was expected. There is good support at the SPX 1364 pivot, the twice tested low for 2007. A correction to this level is the mostly likely target.
MEDIUM TERM: correction
All of the nine US indices we follow, as well as most of the foreign indices are in downtrends. We warned of this potential weeks ago while the SPX was trading around 1530. At that time the internals in the indices were breaking down, and later downtrends were confirmed across the board. Last week the SPX traded as low as 1416, and the DOW 12,796. These levels already represent a 10.2% correction in the SPX, and a 9.9% correction in the DOW. There have only been two greater corrections in the entire bull market: August 2007 (SPX 11.9%), and March 2003 (SPX 17.3%). Should the SPX reach 1364 during this downtrend it would represent a 13.5% correction and fit exactly with what we were expecting during the summer. Technically, the weekly RSI readings are already oversold, and the MACD readings are closing in on being oversold as well. Waiting for an extreme reading, like that in April 2005, before looking for a bottom.
With the market closing friday at 1441, support for the SPX is again at 1438 and then 1410, with resistance at 1462, and then 1484. Short term momentum is rising but not overbought. The market should continue to trade within these pivot points until 1410 is broken to the downside. Then the lower 1383, and 1364 pivots will come into play. If the market experiences a significant wash-out before it bottoms, then the pivots at SPX 1344 and 1327 could be reached. For now SPX 1364 appears to be the likely target.
The Asian markets, with the exception of India’s BSE, are all in downtrends. The strongest of the group remains Australia’s ASX, and the weakest Japan’s NIKK.
The European markets are also downtrending, with Germany’s DAX doing the best, and England’s FTSE nearing its August lows already.
Bonds continue to rally during their uptrend as the 10YR yield momentarily dropped below 4% for the first time in over two years.
Crude challenged the $100 level this week. Negative divergences are starting to build in this sector.
Gold recovered to rally again over $800, but negative divergences are starting to build here as well.
The Euro continues to uptrend as the USD downtrend continues. Similar negative divergences in the Euro are building here as well.
Still bullish long term while the market corrects in what appears to be a Major wave 4. On the economic front, the retailers black friday appears to have been a success with an 8% increase in sales year over year. This week the FED’s beige book will be released wednesday at 2:00. Starting tuesday with the Case-Shiller housing price report, there are a slew of economic reports. Existing home sales and durable goods on wednesday. The revised Q3 GDP report on thursday, then core PCE on friday. The market volatility should continue. Best to your week!