After two months of good gains and small pullbacks, the market had its largest weekly decline since February: SPX/DOW -3.7% and the NDX/NAZ -3.5%. Crude (+4.9%) and commodities (CRB +1.1%) made new highs, the Euro rallied 1.1% and Gold gained 2.9%. Inflation quickly moved to the forefront of economic news after the FOMC minutes reported the FED had raised its inflation forecast from 2% to 3%+ for 2008. The inventory of unsold homes hit 1980 levels, as unit home sales decreased along with home prices. The good news is it’s a three day weekend as we celebrate Memorial day. A holiday commemorating those who have given their lives in defense of this country and what it represents. We salute you!
LONG TERM: bear market
For two months the market has rallied from the OEW pivot at SPX 1261 to the OEW pivot at 1440. The market rally was launched by another FED intervention when they bailed out the bondholders of BSC, handed BSC to JPM, dropped short term rates 1.25% in one month, and pledged to bail out both major banks and investment banks. As a result the credit crisis eased somewhat, and banks raised much needed capital while diluting shareholder equity. The two month uptrend retraced better than 50% of the bear market decline as the SPX rallied 14.6%. Despite the euphoric rise in bullish sentiment, and the claims that the bear market was over, the uptrend looked corrective. Bear market rallies can look quite impressive, and some in the past have looked even more impressive than this one. But OEW is not about who is saying what, but what the market is projecting for the future. Uptrends during bull markets are impulsive five wave rallies, that are only partially retraced, as one uptrend builds upon another to complete a larger five wave pattern. Uptrends during bear markets are corrective three wave rallies, that only partially retrace the ongoing bear market, before making lower lows. This recent uptrend still appears to be corrective in nature, and not impulsive. This continues to imply that the bear market is not over.
MEDIUM TERM: uptrend appears to have topped at SPX 1440
At the beginning of the bear market the waves were very methodical: a November low, December high, January low, February high and March low. This can be counted as five waves down as noted on the DOW charts, or a complex abc pattern as noted on the SPX charts. From the March low the bear market changed character, in that it rallied for two months: a May high. Clearly the Jan/Mar low was one of some significance. Our preferred count, as posted on the SPX charts, is three Intermediate waves down from the October highs forming Major wave A in January. Then an irregular three Intermediate waves forming Major wave B at the recent May highs. This should be followed by three Intermediate waves to lower lows forming Major wave C. Since Major wave A was about 300 SPX points, and Major wave B 170 points, then Major wave C will equal A at SPX 1140, near our SPX 1070 Primary wave IV target. Secondly, Major wave A divided into three waves: 170 points down, a 120 point rally, and then 250 points down. Recently Major wave B divided into an irregular three waves: 120 points up, then a slightly lower low, and finally a net 170 points up from the January low. Notice the recurring pattern? The December rally and the February rally were an equal 120 points. The recent May rally of 170 points was effectively equal to the first decline of the bear market, the November low. In other words, the trends of this bear market have unfolded in 120 points, 170 points and a panic 250 points. What this suggests, counting from a SPX 1440 uptrend top, the next decline should be 170 points (SPX 1270), or if a panic ensues 250 points (SPX 1190). Then a 120 point uptrend rally, to be followed by another 170 or 250 point downtrend. If the former (1440-1270-1390 and then the low), the market could stay in a trading range for some months to come, with bullishness remaining. If the latter (1440-1190-1310 and then the low), the resumption of the bear market will be obvious and bullishness will decline. Considering how the FED has responded aggressively every time the market has approached SPX 1270 a trading range is likely.
From the March lows the uptrend continued to work its way higher, first exceeding the 1383 OEW pivot, then the 1410 pivot, as it approached the 1438 pivot. At several points it looked like it was ready to breakdown, but buying came in at the support pivots; first 1327, then 1364 and finally 1383. On monday the SPX challenged the long term 1438 pivot, hovered around it for two hours, and then immediately headed lower. By tuesday, the selling stopped at the 1410 pivot. Then on wednesday the 1383 pivot was challenged for the first time since early May. This level held on thursday, but friday that pivot broke support and the market is now heading to the next pivot at 1364. Support is now at 1364 and then 1344, with resistance at 1383 and then 1410. During the first two significant downtrends of this bear market, the first wave down was approximately 80 points. Counting from the SPX 1440 high, this would imply about 1360, which is right at the 1364 pivot. Expecting the market to find some support there, or possibly down to 1344, before any significant rally. Short term the market is oversold, and the near term indicators are oversold too.
The Asian markets have all benefitted from the uptrends in the West. China, however, has had a difficult time both socially and financially in recent months.
The European markets have been moving with the US in a counter-trend bear market rally as well.
The Commodity markets, Brazil and Canada, both made all time new highs during this uptrend. Both are in bull markets.
Bonds bounced around this week, but continue to downtrend in their bear market.
Crude made all time new highs as its bull market uptrend continues.
Gold rallied 2.9% as it appears to be in a new uptrend within its bull market.
The Euro rallied, as the USD had another weak two-month uptrend that is beginning to breakdown again.
Trading starts in the US on tuesday with a potential bang. At 9:00 the monthly Case-Shiller housing price indicator will be released, then new home sales at 10:00. Wednesday April durable goods orders. Thursday a Q1 GDP revision and jobless claims. Then friday the PCE index and the Chicago PMI. The FED also has speeches prepared with Kroszner on tuesday, then Bernanke and Kohn on thursday. The volatility should continue.