US markets surged on monday in anticipation of Treasury secretary Geithner’s new bank bailout plan. After the legacy debt plan was announced, and investors had a chance to digest the news, the US market was basically flat for the rest of the week. Economic reports for the week were generally positive, with Existing/New home sales rising, Durable goods orders turning positive, and Consumer sentiment rising. Yet, Unemployment claims remained high, and Q4 GDP remained at -6.3%. For the week the SPX/DOW gained 6.5%, and the NDX/NAZ were +5.7%. The Asian markets surged 8.2%, led by India’s 12.0% rise. European markets lagged +2.4%, and Brazil/Canada were +4.2%. Bonds dropped 2.0%, Crude gained 0.6%, Gold was off 3.0%, and the Euro was -2.2%.
LONG TERM: bear market
After the SPX hit 667 in early March and started to rally we anticipated that the first phase of the bear market had ended. We are expecting the bear market to take the form of a large ABC consisting of three Primary waves. At the Mar 09 low we could count five waves down into the Mar 08 low, a rally into May 08, and then another five waves down into the recent low. In basic EW terms this is a simple zigzag: 5-3-5. We have labeled each of these major moves as Major waves ABC. Each of the waves within the Major waves have been labeled as Intermediate waves. See SPX weekly chart in link below. At the lows there were positive divergences on all timeframes, except the monthly charts which were the most oversold they had been in decades. When reviewing the three previous Cyclical bear markets (1929-1932, 1937-1942 and 1973-1974), we observed that after all three dropped about 50%, they bottomed and then retraced about 50% of the decline in a bear market rally. Our current bear market had dropped 58% (SPX) and 54% (DOW) at the recent lows. Anticipating that this bear market will follow the same pattern, this would project a bear market rally (Primary wave B) to around SPX 1100. When applying the long term OEW pivots we find one right at SPX 1107. These pivots have worked very well during this bear market.
MEDIUM TERM: strong rally, awaiting uptrend confirmation
While all of the Asian markets we follow (ASX, BSE, HSI, NIK and SEC) have confirmed uptrends. Plus some sectors within the SPX, such as the XLB, XLK and XLY, have confirmed uptrends. It appears to be only a matter of time before the SPX/DOW, NDX/NAZ and the FTSE/DAX confirm uptrends as well. In the meantime the SPX has rallied from 667 to 833 on thursday, a 25% rally off the lows in just three weeks. In percentage terms, this represents the second strongest rally of the entire bear market. The best uptrend was from Nov 08 – Jan 09, which rallied 27% and took six weeks to unfold. From the Mar 6th low until monday Mar 23rd the rally looked very impulsive. Since the monday close at SPX 823, however, even the rallies up to the thursday high at SPX 833 have looked choppy. Either the market is consolidating recent gains or running out of short term upside momentum. Let’s not forget that this is still a bear market and subject to volatile swings at a moments notice. Nevertheless, even if we get a sharp pullback from current levels there should be much more upside potential before this rally concludes.
Support for the SPX has remained at 789 and then 768, with resistance at 848 and then 912 for most of the week. Short term momentum was rising all week until wednesday’s highs and has declined to just below neutral into the close on friday. We continue to maintain the current short term count, as long as wednesday’s low at SPX 791 holds. As mentioned earlier the recent action has been choppy, and this has opened the possibility to other potential counts. Also, there are negative RSI divergences on both the hourly and daily charts at the recent highs. Therefore some short term caution is advised until this situation is resolved. A 25% rally in just three weeks is quite an upside move. Thus far the biggest pullback has only been 33 SPX points, and that occurred between tuesday/wednesday of this week.
The Asian markets are all in confirmed uptrends, and all are at short term overbought levels going into next week.
The European markets have not confirmed uptrends yet, but are overnought as well.
The Commodity equity markets are close to confirming uptrends and display some negative divergences short term.
Bonds dropped 2.0% this week but are still in an uptrend. With short term rates declining it looks like a retest of the lows in rates are next.
Crude was relatively flat +0.6% this week, but is still uptrending.
Gold dropped 3.0% on the week and appears to be holding up fairly well during this correction.
Currencies reversed last weeks sharp moves, but the USD/YEN are still downtrending and the EUR uptrending.
Big week ahead and possibly an historic one as well. This weekend a pre G-20 meeting is underway. On monday FED governor Duke gives a speech at UNC. Tuesday Case-Shiller home prices will be reported, along with Chicago PMI and a Consumer confidence reading. On wednesday the ADP employment report, ISM manufacturing, Construction spending, Pending homes sales and Auto sales. Thursday the G-20 meeting officially gets underway in the UK. In the US the weekly Jobless claims and Factory orders will be announced. Then on friday Non-farm payrolls, the monthly Unemployment rate and ISM services. Also, FED vice chairman Kohn gives a speech in OH, and FED chairman Bernanke gives a speech about the FED’s balance sheet in NC. If the G-20 meeting lives up to expectations all markets should get quite volatile around the time it begins. Best to your week and be careful!