Markets calmed down this week to finish mixed: SPX/DOW -1.2% and the NDX/NAZ +0.5%. The FED was quiet, but their new lender of last resort policy witnessed banks and brokers at the FED window every day this week. The economic reports were also mixed; housing prices continued to decline, unsold inventories improved a bit, durables goods orders slackened, but unemployment claims and the core PCE were better than expected. Starting this tuesday the first of the much watched ISM reports, then the ADP employment report, and the Jobs reports on friday. Could be quite a volatile week.
LONG TERM: bear market
From an Elliott Wave perspective, bear markets are far more difficult to follow than bull markets. In bull markets the trend is up, and the overall structure is clearly five waves. The rising waves are impulses containing fives waves, and the corrections alternate between waves of similar degree. In bear markets the trend is down, and the overall structure is clearly three waves. Yet, just like corrections during bull markets, which can take many forms: zigzags, flats, triangles and complex. So too can bear markets unfold in many structures and forms. The main objective in a bear market, just like a bull market, is to remain aware of the overall trend. If one buys into a bull market, even if at the wrong time, the general uptrend will usually compensate for that mistake. Not so in a bear market. Since the general trend is down, typically 75% or more of the stocks, will be declining with the trend. Remain aware of the overall trend. Fortunately EW provides some excellent guidelines for tracking corrections during bull markets. These guidelines are also applicable to bear markets, since a bear market is usually nothing more than a correction of the previous bull market. The general EW rule is that a correction will decline to the 4th or 2nd wave of a lesser degree. In OEW we expand upon that rule. If the fifth wave of the lesser degree waves was shorter than the first, then a decline to the 2nd wave is likely. And, if the fifth wave was longer, then a decline to the 4th wave should satisfy the correction. Since the recent 2002 – 2007 bull market contained an extended fifth wave, a decline to the 4th wave should be sufficient to end the bear market. That level is at the 2004 lows, or SPX 1061. Therefore, despite all the gyrations in the bear market as it unfolds, continue to remain aware of the overall trend.
MEDIUM TERM: rally from 1257 still underway
Since the beginning of 2008 the FED has appeared to be defending the SPX 1270 level. In January, the FED surprised the market with a 75 bps fed funds cut, before the open, just as the market was gapping down to the 1270 level. A counter trend uptrend into February followed. Two weeks ago, the FED cut the discount rate on a sunday night, (and followed up with another 75 bps cut on that tuesday), just as the market was gapping down to 1270 again. This time it bottomed at 1257, and rallied 100 points in a few days. Certainly extraordinary events, i.e. huge bank losses (SoGen) or failures (BSC), forced the FED’s hand. However, since they also defended the SPX 1370 level in August, with a surprise 50 bps cut on options expiration day. It leads us to believe they are targeting these ## 70 levels, and SPX 1170 and SPX 1070 are certainly on their radar screen. The first two surprise rate cuts, August and January, led to confirmed uptrends. This recent one appears to have aborted the downtrend to SPX 1257, but so far, a new uptrend has not been confirmed. The financials (XLF), the banks (KBE) and the industrials (XLI) surged on the first two cuts, just like they did a week ago. This week, however, the market hit SPX 1360 on monday and then tailed off to 1313 before the close on friday. Since this bear market has been consistent in its patterns and reactions to the FED thus far. We’re expecting another rally after the market gets oversold near term.
In regard to the OEW wave count. From the 1576 October high to the low 1270 low in January, a clear ABC unfolded which we labeled as Major wave A. Since then the market uptrended to 1388, then downtrended to 1257, and has since rallied. During the downtrend the action was quite choppy, and appears more correctional than anything else. Therefore, we have tentatively stretched out Major wave B from topping in February at 1388 to a more complex pattern. Currently we are labeling the February 1388 high as Intermediate wave A, the March 1257 low as Intermediate wave B, and this rally (should we get that uptrend) as Intermediate wave C, to conclude Major wave B. There is certainly large overhead resistance in the 1380 – 1400 area. A rally up to that level would display an inverted ABC flat for Major wave B. The bear market should resume at that point.
From the SPX 1257 low on March 17th, the market rallied in a small abc pattern into the recent high at 1360. At the highs we noted that the near term indicators were the most overbought that had been since the bear market began. The market turned over at that point and headed lower, day by day, into the close on friday when the SPX hit the EW pivot at 1316. The high at 1360 ran into resistance at the 1364 pivot, then gradually the 1344 pivot and the 1327 pivot failed to hold support. Currently with the close below 1316, support is at 1287 and then 1261, with resistance at 1316 and then 1327. Short term momentum is oversold. Expecting this entire rally to be an ABC, with the A wave having been completed at 1360, and the B wave is currently underway. If the EW 1316 pivot can hold early in the week, the near term indicators should get sufficiently oversold to generate a good rally. If the 1316 pivot doesn’t hold, there is another level just before the 1287 pivot, SPX 1295. This is only a short term support level, as it was the low after the first rally in the abc from 1257 to 1360. So let’s first observe the 1316 level, and then 1295 or 1287 for signs of a short term bottom in the coming days. Always use tight stops when trading this market.
Bonds: For the first time in many months short term rates (1YR) are projecting only a 25 bps cut. This would indicate that a top in the Bond market is close at hand.
Crude: Has been uptrending since January, but looks like its ready to start heading lower.
GOLD: The nine month uptrend in Gold appears over, expecting a correction to the $773 level.
Euro/USD/Yen: The USD/Euro appear ready to reverse their long term trends, as soon as we get a trend reversal in both. The Yen is still uptrending.
CRB: Has been choppy of late, but its uptrend remains for now.
In Asia: All these markets remain in downtrends but have rallied of late. They all seem to be reacting to the western markets.
In Europe: Both the FTSE and DAX are still in downtrends, but will be watching Europe for signs of an uptrend reversal in the US.
N/S America: Both Canada and Brazil have held up well during their downtrends, much more so than the rest of the world’s markets.