Economic reports for the week were generally inline with expectations. Existing homes sales were higher, new home sales lower, and home prices continued to decline. Durable goods orders continued to rise, and the final revision to Q1 GDP was raised from -5.7% to -5.5%. Over the past four quarters the GDP has dropped 15.1%. Weekly jobless claims remained over 600K, yet personal income and consumer spending reportedly rose. The markets started the week on the downside, and spent the rest of the week recovering. For the week the SPX/DOW were -0.8%, and the NDX/NAZ were +0.6%. Asian markets rose 1.6%, Europe was -1.9%, and Commodity equity markets were +0.7%. Currencies were volatile with the Euro (+0.9%) and Yen (+1.2%) rising, and the USD (-0.6%) declining. Bonds gained 0.3%, Crude lost 1.2%, and Gold added 0.6%. This upcoming week ends the the first half of the year, and non-farm payrolls with be reported on thursday.
LONG TERM: bear market
From the bull market high in October 2007 at SPX 1576 the bear market has declined in two sets of five waves. We continue to label this structure as Major wave A (Mar08 SPX 1257), Major wave B (May08 SPX 1440) and Major wave C (Mar09 SPX 667), a Primary wave A zigzag. Since all bear markets unfold in three waves. Upon the conclusion of Primary wave A, we expected a Primary wave B rally to be followed by a Primary wave C decline to end the bear market. This is the overall pattern we projected way back in early January 2008 when OEW first confirmed the bear market. Nothing has changed. A few days after the completion of Primary wave A at SPX 667, we projected that the Primary wave B rally should now be underway. We initially projected a 50% retracement of the entire bear market, and then lowered our expectations in May to either a 50% rally (SPX 1001) or 50% retracement (SPX 1122). Historical rallies of this wave degree have displayed both potentials. Thus far, the SPX has rallied to 956, a 43% rally from the 667 Mar08 low. When the end of Primary wave B is confirmed, the next downleg of the bear market, Primary wave C, will be underway. There are two potential downside targets for Primary wave C. First, a gradual five wave decline and retest of SPX 667. Second, a more dramatic decline, taking the form of a zigzag, which should bottom around SPX 400. Currently we favor the second scenario. With somewhat limited upside potential, the current risk of remaining invested in the equity markets is high.
MEDIUM TERM: uptrend may have topped at SPX 956
A couple of trading days after the SPX hit 667 in March. We noticed some very strong buying which aligned with a few economic/political events. Primary wave B had apparently kicked off. As the uptrend unfolded the initial surge was quite impulsive, which is bullish. However, as it continued to unfold it started to display the typical signs of a countrend rally: diagonal triangles and overlapping waves. We have counted the uptrend as an ABC: Major A (SPX 833), Major B (SPX 780), and then a five wave Major wave C rally up to SPX 956. This count displays that Major wave C (176 points) is nearly equal to Major wave A (166 points), which is a common relationship for a zigzag. After the SPX hit 956 on June 11th, negative divergences appeared on all timeframes. Over the next eight trading days the SPX dropped to 889, 67 points. This is the largest short term drop since the uptrend began in March. Also, during the decline the SPX triggered one of our OEW leading indicators for trend changes. This indicator has been spot on during this bear market. From tuesday’s SPX 889 low the market rallied to SPX 922 on friday (33 points), which is about a 50% retracement of the 67 point decline. This type of action has been typical of the beginning of previous downtrends. For example, the downtrend that started in May08 at the Major wave B SPX 1440 high, was a 67 point decline wave 1, followed by a 33 point wave 2. OEW has not confirmed the downtrend yet, but indicators suggest that it may be underway. Also three of the SPX sectors (XLB, XLE, XLI) are in downtrends, as well as, the DAX and the FTSE.
Support for the SPX remains at 912 and then 848, with resistance at 935 and then 961. Short term momentum is rising and not overbought. Initially we counted the decline from SPX 956 as a 1-2, i into the 889 low. With the rally from SPX 889 to 922, we are now more comfortable with labeling the entire decline from 956 to 889 as a Minor wave 1, and the rally Minor wave 2. The DOW made a lower low with the final push down, but the SPX did not. This divergence may have helped the market rally as it did. The DOW, however, displays a clear five waves from its high at 8876 to 8259. Best to your trading!
The Asian markets rose 1.6% for the week, as Hong Kong outperformed the group. Negative divergences still appear on most of these indices.
The European markets dropped 1.9% on the week, and both the DAX and the FTSE are now in confirmed downtrends.
The Commodity equity markets were +0.7% on the week, but both are displaying negative divergences.
Bonds were +0.3% on the week, and 10YR yields have dropped from 4.01% to 3.49%. It appears a downtrend in yields will be confirmed shortly.
Crude was -1.2% on the week. The uptrend from February appears to have ended with negative divergences.
Gold gained 0.6% for the week, as it held support at the previous 4th wave $915, and is now trying to extend its uptrend from April.
The USD (-0.6%) has been going sideways, but expecting some strength into early July. The Euro (+0.9%) and Yen (+1.2%) gained on the week.
Tuesday kicks off the week with the Chicago PMI and the Consumer confidence reading. Wednesday: ADP employment, ISM manufacturing, Construction spending and Auto sales. On thursday the regular weekly Jobless claims, along with Non-farm payrolls, the Unemployment rate (10%?), and Factory orders. Friday is a holiday in the States, Independence day. "The answer to 1984 is 1776". Best to your weekend and shortened trading week.