Interesting week. Early in the week the market stabilized on much worse then expected home sales reports. Then started making lower lows after the ‘stay the course’ FOMC statement on wednesday, on thursday, and after the better than expected, but exaggerated, Q4 GDP report. The economic reports for the week were generally positive, with the exception of new/existing home sales and case-shiller home prices. Consumer confidence/sentiment rose, Q4 GDP was reported at +5.7%, the Chicago PMI and durable goods orders rose, and weekly jobless claims eased a bit. For the week the SPX/DOW were -1.3%, and the NDX/NAZ were -2.8%. Asian markets lost 3.6%, Europe was -2.1%, and the Commodity equity sector was -1.7%. Bonds gained 0.2% on the week, Crude was -2.2%, Gold was -1.0%, and the USD gained 1.5%. The upcoming week centers around the ISM reports and friday’s monthly Jobs report.
LONG TERM: bear market
We continue to maintain our long term count of a large three wave ABC bear market. The detailed zigzag decline from Oct 07 at SPX 1576 to Mar 09 at SPX 667 was labeled as Primary wave A. The zigzag rally from Mar 09 at SPX 667 to Jan 10 at SPX 1150 is labeled Primary wave B. This downtrend, that was confirmed by OEW a week ago, should be the first Major wave down of a larger five wave decline to form Primary wave C. We are expecting the SPX to bottom in late 2010 near the previous low of SPX 667. Should this scenario unfold, as expected, the entire bear market would form a three year ABC flat. Alternating with the three year ABC zigzag of 1929-1932. This scenario also fits with the reliable four year presidential cycle, which is due to bottom in the second half of 2010.
Anticipating future wave formations, using OEW and historical market patterns, is only part of the work. Monitoring and adjusting, when necessary, are the other parts of an analyst’s mindset. We have detailed what appears to be the most probable outcome, for the next several months, in the above paragraph. Next we have to generally determine how each of these five Major waves should unfold. Then monitor their wave development. During Primary wave A each of the downtrends were impulsive five wave structures, and the uptrends were corrective three wave structures. Therefore, since we should now be in a similar large downtrend: Primary wave C. All of its downtrends should be impulsive five wave structures, and its uptrends corrective three wave structures. The first downtrend, of course, is the most important. If it is an impulsive five wave structure then the Primary wave C scenario is likely underway. If not, an adjustment of some degree will then be required.
MEDIUM TERM: downtrend hits SPX 1072
A week ago OEW confirmed downtrends in the SPX/DOW. This week most of the other US indices confirmed downtrends as well, including seven of the nine SPX sectors. On the international front, last week only 4 of the 13 foreign indices we track were in confirmed downtrends. This week that ratio rose to 10 of 13. Based on this data one would assume that the US has led the rest of world’s markets lower. This, however, is only part of the picture. China’s SSEC and Hong Kong’s HSI have been in confirmed downtrends since late december. The leaders of the anticipated worldwide economic recovery, China and Hong Kong, rolled over first. It then took the rest of the world two to three weeks to follow. Something to keep in mind in the weeks and months ahead.
The extended uptrend from July 09 to Jan 10 ended on Jan 19th at SPX 1150. The top of Primary wave B fit nearly perfectly with the anticipated convergence of several technical observations. We started posting about this convergence in early december. In the eight trading days since then the SPX has dropped nearly 7%, wiping out over two months of market gains. The last time the market corrected this quickly, in percentage terms, was in Jan 09. Then the market dropped over 13% in just seven trading days after an uptrend high. During that downtrend, which ended Primary wave A, the market lost 29% of its value in just two months. We’re not expecting that much damage during this downtrend. We are, however, expecting a potential decline into the OEW 961 pivot over the next two months. This would represent about a 16% market loss. This is certainly not a time to be complacent about the stock market.
Support for the SPX remains at 1061 and then 1041, with resistance at 1090 and 1107. Short term momentum continues to vacillate between neutral and slightly oversold. We are projecting that this downtrend, Major wave 1, will unfold in five Intermediate waves. This downtrend is only the first of five Major waves for Primary wave C. Thus far the decline continues to look like an impulsive Intermediate wave 1. None of the rallies have been sufficient to indicate that an Intermediate wave two has occurred. Thus far we are counting this decline as four completed Minor waves within Intermediate wave 1, and Minor wave 5 still underway, (green labeling). The count: Minor 1 SPX 1129, Minor 2 SPX 1142, Minor 3 SPX 1083, Minor 4 SPX 1100, and Minor 5 appears to be in the third Minute wave of its decline. With the next support pivot at 1061, we expect that Intermediate wave 1 will bottom within the pivot range: SPX 1054-1068. Then the market should experience a fairly good relief rally, potentially 50+% retracement, for Intermediate wave 2. This should take the form of an ABC three wave corrective rally. Then Intermediate waves three, four and five should unfold to complete the downtrend probably in March. Best to your trading!
Asian markets were all lower on the week losing 3.6%. All indices we follow are in confirmed downtrends with the exception of Japan’s NIKK.
European markets (-2.1%) were all lower as well. All indices are in confirmed downtrends except the Swiss SMI.
Commodity equity markets all declined losing 1.7% on the week. All but Russia’s RTSI are in confirmed downtrends.
Bonds gained 0.2% on the week. All Treasury rates are in downtrends, and Bond prices are now in uptrends.
Crude lost 2.2% on the week. The decline from $84 to $72 has been more than expected, and Crude has nearly retraced the entire Dec-Jan uptrend. With the GTX commodity index, nearly 70% energy based, already in a full retracement downtrend. Crude prices should remain under pressure.
Gold lost 1.0% on the week. The Intermediate wave four correction we have been anticipating, in the form of a flat, has occurred. There is a positive divergence on the daily chart, which is similar to the Intermediate wave two positive divergence low. It’s time for Gold to start displaying some upside progress.
The USD gained 1.5% on the week. It has entered the anticipated resistance zone for its uptrend, see daily chart (page 12). It’s quite overbought short term, so a pullback is likely. The next fibonacci resistance level is at 80.80 on the DX. Expecting an uptrend top in that area. The EUR lost 2.0% on the week and is quite oversold. The JPY lost 0.4% on the week, has rebounded off its lows, and is trying to confirm an uptrend.
Busy week ahead. Monday we have Personal income/spending at 8:30, then Construction spending and ISM manufacturing at 10:00. Tuesday, Pending home sales in the morning and Auto sales in the afternoon. On wednesday, the ADP employment index and ISM services will be reported. Then on thursday weekly Jobless claims, Productivity and Factory orders. Friday is Payrolls day, with the Unemployment rate and then the Consumer credit report in the afternoon. As for the FED. Foreign exchange rates will be reported on monday. Then on wednesday a speech from FED governor Warsh in NYC. Best to your weekend and week!