Another mixed performance for the economic reports, but a good week for equities. This week monthly import/export prices continued to be reported higher, but the PPI/CPI remained negative? In manufacturing, Industrial production rose along with the Empire index, but the Philly FED and housing starts/permits declined. The current accounts deficit rose as did jobless claims, but the BEA LEI turned positive from a negative reading last month. For the week the SPX/DOW gained 2.4%, and the NDX/NAZ gained 3.3%. Asian markets rose 1.3%, Europe gained 2.6%, and our Commodity equity group rose 2.5%. Bonds were -0.1%, Crude rallied 4.6%, Gold was +2.5%, and the USD declined 2.1%. This week we have the FOMC meeting, home sales and another Q1 GDP revision.
LONG TERM: bull market
Historically bull markets unfold in five waves and bear markets in three waves. We had a historic 13-year five wave bull market from the crash low in 1987 to 2000. A three wave bear market from 2000 to 2002. Another five wave bull market from 2002 to 2007, and another three wave bear market from 2007 to 2009. Now, we’re in another five wave bull market. RN Elliott defined the wave patterns, the market creates them, and OEW quantifies them.
We expect this bull market to unfold in five Primary waves. The first Primary wave completed in Apr10 at SPX 1220. It consisted of five Major waves from the Mar09 SPX 667 low: Major 1 Jun09 SPX 956, Major 2 July09 SPX 869, Major 3 Jan10 SPX 1150, Major 4 Feb10 SPX 1045, and Major 5 Apr10 SPX 1220. After a five wave advance one would expect the largest correction of the new bull market. The current correction has already declined 14.7%, and is larger than both previous corrections of 9.1%. Also after a very strong advance, the SPX rose 83% in 13 months, one would expect a multi-month correction after two single month corrections. The current Primary wave II correction has already lasted two months. Technically, everything appears as it should be at this stage of the bull market.
Our goal is to objectively track the market using the quantfied waves, technical analysis and quantified economic data. When combining all this data together we then create probabilities for the short, medium and long term. Long term, it’s a bull market!
MEDIUM TERM: downtrend low at SPX 1041
The two month correction from the Apr10 SPX 1220 high to the recent Jun10 SPX 1042 low looks a like a completed wave pattern. We identified the completion of this pattern when the market had a sharp reversal day on Jun 10th. Under normal conditions this would have signalled an end to the correction, and a potential new uptrend underway. The market had found support at an important level, (the previous 4th wave), all technical indicators were oversold up to and including the weekly charts, and we had a completed wave pattern. We hesitated to call this the Primary wave II correction low for three reasons. First, after a very strong five waves up to kick off a bull market the market usually needs some time to consolidate after the recent gains. The most recent example of this is 2004. Second, the 4-year cycle low should be at work and the typical bottoming months are in July and October. The most recent example of this is 2006. Third, the weekly LEI has turned negative indicating a softening in the economy. This also happened in 2004.
When considering all this data our most probable count suggests that only Major wave A, of a three Major wave correction, bottomed at SPX 1041/1042. Major wave B should now be underway. Then upon completion another downleg for Major wave C should follow to complete Primary wave II. The typical retracement levels for a B wave rally are usually contained within the 38.2% to 61.8% area. This suggests three areas of price resistance: 38.2% = SPX 1110, 50.0% = SPX 1131, and 61.8% = SPX 1152. Again, as is usually the case, these areas all align with our OEW pivots: 1107, 1136 and 1146 respectively. Since the OEW 1107 pivot has already been cleared, the markets next objective is the OEW 1136 pivot.
The next most probable count is posted on the DOW charts. This suggest that Primary wave II ended at the recent low and Major wave 1 of Primary wave III is now underway. For this scenario to increase in probability this rally needs to remain impulsive and it eventually needs to clear the OEW 1176 pivot.
Support for the SPX is at 1107 and then 1090, with resistance at 1136 and then 1146. Short term momentum is rising and slightly above neutral. The rally, thus far, looks impulsive. After a retest of the SPX 1041 low on June 8th. The market rallied in Minor wave 1 to SPX 1078, then pulled back in Minor wave 2 to SPX 1052. Since then this market has impulsed higher in what appears to be Minor wave 3. When this short term rally rolls over into Minor wave 4 and then a higher Minor wave 5, Intermediate wave A should have completed. Then we should be able to make the next assessment of this rally. Currently we’re expecting five Minor waves to complete Intermediate wave A, possibly around 1136. Then an Intermediate wave B pullback. This is to be followed by another five Minor waves to complete Intermediate wave C, possibly around 1146. This is just a potential pattern for Major wave B. Best to your trading!
Asian markets gained 1.5% this week. Uptrending India’s BSE led (+3.0%) and China’s SSEC lagged (-2.2%).
European markets gained 2.6% on the week. Spain’s IBEX led (+4.3%) and Switzerland’s SMI lagged (+0.3%).
The Commodity equity group gained 2.5% on the week. Russia’s RTSI led (+4.1%) and Brazil’s BVSP legged (+1.1%).
The uptrending Bond market lost 0.1% on the week. Shorter term rates continue to decline. The one year is only 4 basis points above its low.
The Crude market gained 4.6% on the week. This market, like Bonds, remains quite choppy longer term.
Gold rallied 2.5% on the week to all time new highs. Still uptrending medium and long term.
The USD ran into some headwind this week declining 2.1%. This is the largest weekly drop for the USD since the last downtrend.
Economic reports begin on tuesday with Existing homes sales. On wednesday we have New home sales. Then on thursday the weekly Jobless claims and Durable goods orders. On friday the second Q1 GDP revision and the bi-weekly Consumer sentiment reading. The FED meets for its regular FOMC meeting on tuesday/wednesday, with the often volatile FOMC statement wednesday afternoon. Best to your nearly summer weekend.