After the big surge in stocks late last week. This week was filled with mostly disappointing news. Economic reports such as homes sales, jobless claims, and durable goods orders continued to go in the wrong direction. WAMU failed on thursday, the largest bank failure in US history. Congress and the Treasury/FED could not resolve their differences in the so called "bailout plan". As a result the SPX/DOW declined 2.75%, and the NDX/NAZ dropped 4.1%. Rates on the 10-yr Bond rose to 3.83%, Crude gained 4.0%, Gold added 2.8%, and the Euro gained versus the USD 1.0%.
LONG TERM: bullish for potential Primary wave B rally
At the beginning of 2008 we projected that a bear market was underway, to correct part of the 2002 – 2007 bull market. The wave structure was expected to unfold in a series of ABC’s, which is typical of bear markets. For example, the 2000 – 2002 bear market was a series of ABC’s, a triple zigzag. We also projected that the first significant decline, Primary wave A, would take about one year and be followed by a multi-month Primary wave B counter-trend rally. The chart of this projection is still posted in the photo section on this blog. We also expected the decline from the bull market top at SPX 1576, to conclude near the SPX 1100 level. A week ago thursday the SPX hit 1134, and at that juncture Major wave C (May-Sept) equalled Major wave A (Oct-Jan) at precisely 306 points each. Over the next 24 hours the market surged from 1134 – 1265, a 131 point rally. This one day rally exceeded the total advance of three of the four uptrends during Primary wave A. It was certainly the biggest surge since this bear market began. This type of activity usually occurs at significant lows. After reviewing the market internals while the surge was underway, we concluded prior to the opening that friday morning that Primary wave A had probably concluded at SPX 1134, and Primary wave B was underway. Since Primary wave A took eleven months to unfold (Oct-Sept), we would expect Primary wave B to take between six and eight months to unfold, ideally concluding in May 2008. Primary wave B should also take the form of an ABC, consisting of three Major waves. Typically a bear market counter-trend rally of this nature retraces about 61.8% of the previous entire decline. This would project a top near the SPX 1400 level in the spring of next year. This scenario is predicated upon OEW confirming a new uptrend within the next few weeks.
MEDIUM TERM: downtrend may have bottomed at SPX 1134
This week, the market pulled back to an important support level on wednesday at SPX 1180, near the 1179 pivot. Then the SPX rallied into the close on friday to SPX 1216. We are counting this initial surge and pullback as waves 1 and 2 of a potentially new uptrend, and part of Primary wave B. Should this indeed be the scenario, this uptrend will be labeled as Major wave A of an ABC Primary wave B rally. At the SPX 1134 lows, several technical events occurred. There were positive divergences in the SPX on all timeframes, from hourly to weekly, and including the monthly charts. This was confirmed on many timeframes by the DOW. Also many of our longer term technical indicators positively diverged at the lows as well. Technically, all these indicators have created an opportunity for the market to move upward for the next several months. When applying the symmetry thus far displayed by this bear market we can make some some projections for Major waves ABC. There have been two sets of downtrends one between 170-180 points, and the other between 240-250 points. Since we are expecting this next uptrend to be a kickoff to Primary wave B it should be quite strong. This would project an advance of 240-250 points from the 1134 low, suggesting a Major wave A top near the 1383 pivot. A pullback of about 115 points should follow to about the 1261 pivot to end Major wave B. Then another uptrend to about SPX 1440 to end Major wave C and Primary B. Therefore based upon the symmetry displayed thus far in the bear market we would expect the three waves of Primary wave B to unfold: 1383 – 1261- 1440. We’ll post this projection on the SPX weekly chart in green "pending". And, will update the the 2008 forecast, when we get a confirmed OEW uptrend.
Support for the SPX is at 1179 and then 1168, with resistance at 1219 and then 1240. Short term momentum has been swinging from overbought to oversold as the waves from the SPX 1134 low have progressed. Thus far we have labeled this potential uptrend as waves 1 (1265) and 2 (1180) of Major wave A. The near term indicators are also suggesting this wave pattern. The pivot at SPX 1179 remains critical support.
The Asian markets are holding there lows of a week ago. India’s BSE appears to be the weakest of the five.
The European markets are holding their lows as well, with the FTSE leading the way higher.
The Commodity markets have held too, with Brazil performing the best.
After a multi-month rally Bonds have made several gaps down in their ongoing correction. Expecting higher yields.
Crude appears to have bottomed near the previous fourth wave at $92. It’s trying to confirm another uptrend.
Gold has stormed ahead after making a low at $740, with positive divergences. Expecting it to continue higher.
After a two month rally in the USD it has pulled back to initial support near 76. A further pullback is likely, as the Euro rallies.
Another weekend another sunday watch, this time it’s the "bailout plan". On monday the mutual/hedge funds start their window dressing to not only close out the month, but the quarter as well. Also on monday the PCE will be reported. On tuesday the much dreaded Case-Shiller housing price report and the Chicago PMI. ADP employment and ISM manufacturing is reported on wednesday. Then thursday is the weekly unemployment claims and factory orders. On friday another important report, Non-farm payrolls, and then ISM services. Busy week! The FED has little on the agenda other than closing out the "bailout plan". Best to your week!