Despite worsening economic reports the market staged its first 5-day rally since May 2007. If you recall, the uptrend between Mar and July 2007 ended Major wave 3, just before the sharp selloff in August, and then the Major wave 5 bull market top in October. It appears that investors may not be bullish yet, but are certainly less bearish than in recent months. For the week the SPX/DOW were +10.8%, and the NDX/NAZ were +10.1%. Bonds were up 2.0%, as long term rates hit multi-decade lows. Crude rallied 9.0%, Gold gained 3.4% and the Euro edged up 0.8%. For the month of November the SPX/DOW were still down 6.4%, the NDX/NAZ -11.0%, Crude -19.7%, the Euro -0.4%, but Gold soared 14.7%, and Bonds rocketed 8.7% as long term rates dropped a full 1% to 2.96%.
LONG TERM: bear market
In early January we projected after a five year bull market, that a bear market was now underway. What we didn’t realize was how much damage would unfold. Just over a week ago the SPX broke below its 2002 low, wiping out a 60-month bull market in just 13-months. That’s serious damage. Clearly we had misinterpreted some juncture of the long term wave count from 1932-2007. After an extensive review of the entire market, we concluded that the error had to occur between 1973-1982 with that supposed triangular formation. Upon closer examination we realized that it wasn’t a triangle at all, but a 2-year Cycle wave zigzag into the 1974 low. Cycle wave 5 started at that point in time, and concluded last year in 2007. We have adjusted the long term (monthly) charts accordingly. You can review these charts with the link at the bottom of the page. Now that the damage has been done the important question is what’s next. Regardless of the degree of this bear market, whether it be a Cycle wave or a Supercycle wave, the wave structure should be the same, a three wave formation. There are no five wave bear markets. Therefore we are leaving the bear market count exactly the same. Nothing has changed, except the depth of the bear market. We will be updating the charts to the appropriate labeling over time. Originally, in January 2008 we anticipated a 5-year bear market, bottoming in 2012. Based on recent market activity we are shortening this projection by two years. This bear market should end in 2010. But it should still take the form of a large ABC. The large A wave may have just bottomed at the recent lows, and wave B may now be underway.
MEDIUM TERM: downtrend low at SPX 741
The recent low in the SPX, breaking through its 2002 low, was accompanied by a long term positive divergence in the DOW/NDX/NAZ, which failed to break through their 2002 lows. This is a strong positive which could lead to a large uptrend. The first couple of weeks into December should determine whether or not this type of divergence will be a catalyst to a major uptrend. From the October 2007 bull market top, we continue to count a Major wave A into the Jan low, then a Major wave B into the May high. Major wave C has been underway since then. Since Major wave A was comprised of three Intermediate waves, ABC. Major wave C is also comprised of three Intermediate waves. Intermediate wave A ended at SPX 1200 in July, and Intermediate wave B ended at SPX 1313 in August. Intermediate wave C has been underway since then. All of these Intermediate waves have been 5-wave structures. In EW terms from the Oct 2007 top we have had a 5-3-5-x-5-3-5, which is known as a double zigzag. This double zigzag, however, has only completed Primary wave A of a larger ABC bear market. Should the long term positive divergence hold for the next few weeks, Primary wave B should be underway. The likely target for Primary wave B remain at the long terms pivots: SPX 1107 and SPX 1179. SPX 1107 represents a 50% retracement of the bear market thus far. SPX 1179 represents a 61.8% retracement. These levels may appear to be quite optimistic. But the volatility is still there and the market is already up about 20% off the recent lows.
Support for the SPX remains at 848 and then 789, with resistance at 912 and then 935. Short term momentum is quite overbought and displaying a negative divergence in the SPX. The five wave count for this downtrend has been a bit difficult to determine at times. This usually occurs with extended downtrends, and this one is already three months old. The longest downtrend of the bear market. As posted last weekend we had counted wave 1: SPX 1134, wave 2: SPX 1265, wave 3: SPX 840, wave 4: SPX 1008, and wave 5: underway. The shorter term count posted last weekend did not help. Currently we are favoring a wave 4 conclusion at SPX 1044, and an ending diagonal 5th wave into the SPX 741 low. When the short term count becomes difficult it’s often a good idea to look at other indices/markets. We are observing some positive wave structures elsewhere. Three of the Asian markets are already in uptrends for the first time in 5-6 months: Japan, Hong Kong and China. Also Brazil is in an uptrend for the first time since May 2008. Some additional evidence can be found in the currencies, with the Yen already in a downtrend, and the USD having completed the minimum for 5 waves up in its uptrend. There is also an uptrend underway in the XLU – the utility sector, and the GVX – the livestock commodity sector. While this rally is only 5 days old, it’s already showing the right characteristics for an uptrend: impulsing. Thus far there was a two day rally to SPX 869, breaking through the 848 pivot. Then a pullback to 835 in the same day, and market has been moving higher since. The next objective is the resistance at the 912 and 935 pivots, while holding support at the 848 pivot. Should the market break substantially below SPX 835, the recent low, the rally probably aborted. Defensive measures would be appropriate at that time. Best to your trading!
As mentioned earlier the Asian markets are certainly displaying some medium term strength. Japan, Hong Kong and China are already in uptrends.
The European markets have also displayed some relative strength, having failed to make new intraday lows during November.
The Commodity equity markets are split: Brazil is in an uptrend, while Canada lags.
Bonds may have had their best month ever with an 8.7% rise. All treasury rates are at multi-year, if not multi-decade lows.
Crude rallied 9% this week after multi-week declines of over 5%. OPEC failed to cut its level of output at saturday’s meeting.
Gold had a spectacular month gaining 14%. Physical demand appears stronger than the futures market, but the charts still look negative.
In currencies, the Yen is downtrending and the USD/Euro appear ready to reverse their recent trends.
On monday, Construction spending and ISM will be reported. Then wednesday, ISM services and Unit labor costs. Thursday is the weekly Jobs claims and Factory orders. Then friday is the monthly Jobs report, and Consumer credit. As for the FED, Bernanke gives a speech on monday at 1:45. Then Kroszner gives a speech at 10:15 on wednesday, and the Beige book is released at 2:00. Then on thursday, both Bernanke and Kroszner give speeches in Wash, DC at 11:15 and 4:30 respectively. Another busy week. Best to your week!