The market began the week by extending its consecutive days of new uptrend highs to nine by wednesday. Then gave way to its largest pullback in three weeks on thursday and friday. For the week the SPX/DOW were +1.0%, and the NDX/NAZ were +0.4%. Asian markets were +1.4%, European markets were +0.2%, and the Commoditiy equity markets lost 0.2%. Bonds were +0.1%, Crude was -0.9%, Gold was +0.4% and the USD gained 1.2%. The FED met on tuesday and had nothing new to report. On the economic front housing continues to be a problem, the home builders index and housing starts declined. The declines in import prices and the PPI/CPI were highly suspect. On the plus side, industrial production continued positive accompanied by expansion readings in the Empire index and the Philly FED. Leading indicators remained positive and the weekly jobless claims improved. Next week will be highlighted by the Q4 GDP revision, home sales and durable goods.
LONG TERM: bull market
Now that the stock market inflection point has been resolved it’s time to look forward. From the Mar09 SPX 667 SC2 bear market low we can count five waves up into the recent SPX 1170 high. The waves unfolded as follows: Jun09 SPX 956, July09 SPX 869, Jan10 SPX 1150, Feb10 SPX 1045, and the current uptrend SPX 1170 thus far. Normally during a five wave sequence we expect alternation between the two corrections, and then a sizeable correction after the fifth wave concludes. That’s textbook EW. Occassionally, however, the corrections do not alternate in wave structure. This last occurred after the 1987 crash, the 1984 low and the 1982 low. What this wave structure suggests is the first uptrend was of one degree and the second uptrend of one lesser degree. Many EW’ers would refer to this as a 1-2-1-2. This suggests the current uptrend, which is already making new highs, is a third wave of this one lesser degree.
We are counting the Mar 09 SPX 667 low as a Supercycle wave 2 low. This count suggests the first bull market coming off this low will be Cycle wave . The bear market to follow will be Cycle wave . This is exactly how the previous Supercycle (1932-2007) bull market wave 1 began: Cycle  1937 and Cycle  1942. When expecting a bull market to be of a Cycle wave degree we expect it to unfold in five Primary waves. Therefore the first uptrend is usually labeled Primary wave I and the first downtrend Primary wave II. If the first series of uptrends and downtrends are small, which was normally the situation in the 1980’s, then we drop down a degree and label them Major waves. In our current market the first two uptrends were large and nearly equal, while the first two downtrends were nearly equal and of a normal size. This makes the labeling quite obvious. Therefore we have labeled Jun09 SPX 956 Primary wave I and July09 SPX 869 Primary wave II. The Jan10 SPX 1150 high is then labeled Major wave 1 and the Feb10 SPX 1045 low Major wave 2. Major wave 3 has been underway since that low.
Before moving on to discuss Major wave 3 in the next section. We’ll try to address some questions that are on some people’s mind. The stock market and the ‘real world’ economy are not moving in unison. Agree! Some sectors have improved but many americans are still unemployed and losing their homes. This is quite similar to the start of the Supercycle wave one (1932-1937). The country remained in a depression for most americans but the stock market had a five year bull market.
The US and many other countries have more debt than they can service. Agree! The debt is astronomical and will have to be dealt with between now and the next bear market. Remember, debt is either paid, defaulted or depreciated by inflation/currency devaluation. The first two options are highly unlikely.
The SPX does not display a clear impulsive wave count for the July-Jan uptrend. Agree! Without creative labeling it’s difficult to find a completed impulsive wave. The market, however, is not the traders SPX but the often neglected DOW. The DOW has been around for nearly 100 years and, despite the irregular component changes, it’s the most quoted index for the US market. The wave structure in the DOW supports an impulse wave for the second uptrend.
There is no way a bear market rally can turn into a bull market. Disagree! Large B wave bear market rallies start off the same way as a new bull market. In fact they are often mistaken for new bull markets. They start from extremely oversold conditions and panic low prices. What separates one from the other is the rising waves are very choppy for bear market rallies and more impulsive for new bull markets. Then when the often ABC zigzag B wave rally concludes, the bear market starts impulsing to the downside while the bull market only corrects in a small abc. This transition period is an inflection point. In retrospect, we recognized the Mar09 low within days of the event and called for a bear market rally between the 1107 and 1179 OEW pivots. Then in Jan10 we recognized the top of that uptrend and awaited the results of the inflection point. Where we failed, we did not take a less bearish stance when our indicators were improving during July-Aug09. We should have remained bearish but we should have also offered an alternate bullish count in the US. Afterall, we were offering primary bullish counts in many of the foreign markets. Despite OEW displaying the actual waves in all the markets, our approach to reading OEW has yet to become a pure science. But thanks to all the input from our OEW group it’s certainly moving in that direction.
MEDIUM TERM: uptrend hits SPX 1170
In review of Primary wave I and Major wave 1 we find that both traveled nearly an equal amount of SPX points (289 and 281). Primary I took only three months and Major wave 1 took six months, a 3 to 6 relationship in time. Let’s deal with time first. Bull markets typically unfold with waves that are relatively equal in time or increments of a specific time period. Since the first uptrend was three months long (Mar09-Jun09). Then for the second uptrend to qualify as a harmonic of that three month wave, it must have run into trouble at around three months into the six month uptrend, overcame that trouble and then extended another three months. When we review the July-Jan10 uptrend we find that is exactly what occurred. The largest pullback of the entire uptrend occurred between Oct-Nov09, three months into the uptrend, when the SPX dropped 6.5% in just 8 trading days. Somehow it overcame that decline, retracing the entire drop in just 7 trading days, and then had clear sailing into the Jan10 high. This analysis suggests this bull market is working on three month up cycles. Since Major wave 3 started in Feb10 we should be looking for an uptrend top in May 10.
With Major wave 1 being nearly equal to Primary wave I, Major wave 3 can do just about anything in regard to price. Major 3 can be 0.618 of Major 1 (SPX 1219), equal to Major 1 (SPX 1326), or even 1.618 times Major 1 (SPX 1500). Okay maybe not that high! The first two levels, SPX 1219 and 1326, are more realistic. When we review the OEW pivots. Which often provide support/resistance in the SPX. We find several pivots at and in between these two levels. The first pivot is SPX 1222 and the last is at SPX 1313. So this would be the anticipated price range for the current uptrend. Another thing we have noticed about price, we first started mentioning this months ago, is this bull market appears to be tracking the significant waves of the last bull market. For example, Major 1 Dec02 SPX 954 – Primary I Jun09 SPX 956, Major 3 Mar04 SPX 1163 – Major 1 Jan10 SPX 1150. The next significant wave occurred in Mar05 at SPX 1229 and then May06 at SPX 1327. Notice the pattern. To conclude we have significant waves at SPX 1229 and 1327, fibonacci relationships at SPX 1219 and 1326, OEW pivots at SPX 1222 and 1313, and two more months to get to there. Since Major wave 3 will unfold in five Intermediate waves we will not know for a while if it will be the lower or the higher or possibly somewhere in between. Stay tuned.
Support for the SPX remains at 1146 and then 1136, with resistance at 1168 and then 1176. Short term momentum was slightly oversold at the SPX 1155 low on friday and then bounced a bit into the close. Our OEW charts are displaying that the first wave of this uptrend, Intermediate wave one, has been underway since the Feb10 SPX 1045 low. Remember, this uptrend should include five Intermediate waves and last for three months. The short term count suggests the thursday SPX 1170 high could have ended Intermediate wave one. This will not be conclusive until the SPX breaks through the OEW 1146 pivot. As long as this pivot holds there could be more upside progress. There is another count being monitored in the OEW group suggesting only Minor wave 3 has concluded at SPX 1170, or has yet to conclude. This would definitely suggest more upside immediately ahead. For now, we’re going to stay with the count posted on the SPX hourly chart. This suggests Intermediate wave one concluded on thursday and Intermediate wave two is underway. Should we get the downside follow through below the OEW 1146 pivot Intermediate wave two should find support between the lower 1107 and 1136 OEW pivots. Accompanying the low should be an oversold RSI reading on the daily chart. Best to your trading!
The Asian markets gained 1.4% this week, India (+2.4%) led and Japan (+0.7%) lagged. China looks interesting at current levels.
The European markets gained 0.2% this week, Switzerland (+0.7%) led and Spain (-0.8%) lagged. All foreign markets are in uptrends.
The Commodity equity markets lost 0.2% this week, Russia (+0.7%) led and Brazil (-0.7%) lagged.
Bonds were +0.1% on the week. Despite everyone claiming a US Bond market bubble the 10YR has been trading in a narrow price range (115-122) for nearly a year now. And at the end of the month the FED will have ended its last bond support program.
Crude bounced around this week losing 0.9%. All the gains were wiped out on friday. It remains in an uptrend.
Gold had a similar week but gained 0.4%. While we still expect gold to make new highs during this uptrend it may require one more small push lower first.
The USD gained 1.2% on the week tailgating the EUR 1.7% weekly loss. The USD remains in an uptrend while the ECU and Greece exchange pleasantries. The JPYUSD was flat on the week.
On tuesday we have Existing homes sales. Then on wednesday Durables goods orders and New home sales. Weekly Jobless claims follow on thursday, then a Q4 GDP revision and Consumer sentiment on friday. The FED comes out of last weeks FOMC meeting talking mostly off hours. FED chairman Bernanke gives a speech saturday morning in Florida. Vice chairman Kohn gives a speech wednesday evening in N. Carolina. On friday, FED governor Warsh gives a speech about central bank independence at the Shadow OMC in NYC. Then friday evening, FED governor Tarullo gives a speech in the evening in Wash, DC. Maybe it’s time for a Shadow FED. Best to you and yours this weekend and week. Spring has sprung in the Northeast.