This is, has been, and continues to be, an interesting market. When the market seemed like it was ready to drop into a black hole in March 2009, it bottoms and rallies over 80% in 13 months. Then when GDP numbers were being reported at +5.0% per quarter and we get one report under that level the market drops nearly 10% intraday in early May, and the positive economic numbers start to erode quickly. The bears, the bulls, and now the bears again are the majority.
After the two day FOMC meeting the FED left FED funds unchanged, as expected, and issued a statement noting a fragile economy. Economic reports on the week were mostly lower. New/existing home sales declined, as did, durable goods orders and Q1 GDP. On the flip side, weekly jobless claims improved along with consumer sentiment. After a gap up opening monday, China had started de-pegging the Yuan, the markets headed lower for the rest of the week. For the week the SPX/DOW were -3.3%, and the NDX/NAZ were -3.8%. Asian markets were -0.3%, European markets were -3.4%, and the Commodity equity group was -0.9%. Bonds gained 0.2%, Crude was +1.2%, Gold slipped -0.1%, and the USD lost 0.4%. Next week’s economic highlight is friday’s Payrolls report.
LONG TERM: bull market
We continue to count the OEW zigzag from Oct 07 to Mar 09 as a completed bear market. From that Mar 09 SPX 667 low the market progressed in five OEW Major waves into the Apr 10 high at SPX 1220 to complete Primary wave I of the new bull market. Our SPX chart displaying the OEW counts of the 2002-2007 bull market, the 2007-2009 bear market, and the current bull market is posted below. Please note, all significant waves are created by the market, quantified by OEW, and then labeled. In OEW we do not place labels where we think waves should be, only where waves actually occurred.
During the last two months the market has been in a Primary wave II correction. At the beginning of the correction we offered five potential support areas:
1. the flash low at the SPX 1058 pivot.
2. the previous Major 4th wave support at the 1041 pivot.
3. a 38.2% retracement of Primary wave I at the 1007 pivot.
4. a 50.0% retracement at the 944 pivot.
5. a 61.8% retracement at the 876 pivot.
Thus far the SPX has corrected 14.7% and found support twice at the OEW 1041 pivot.
While we are tracking the waves we are also monitoring the world markets, several technical indicators, and a few economic/monetary indicators. Our economic indicators suggest a weakening economy and a likely 20%+ correction. The monthly RSI usually reaches an oversold 30 reading during these types of corrections – currently at 45. Plus, the 4-year cycle low typically occurs in July or October. On balance, these indicators suggest that the US markets should end this correction in either the July or October timeframe with around a 20% correction.
International markets, however, are displaying relative strength. This may indicate that the US correction will not be a straight down one wave affair. Of the thirteen foreign indices we follow three: the BSE, DAX and HSI are in confirmed uptrends. Seven more have the potential of confirming uptrends shortly. If this does occur 10 of the 13 foreign indices we follow would be in confirmed uptrends. If you recall, it was the foreign indices that led the US market lower after the April SPX 1220 high. Now they may be preparing to lead the US market higher. In the end our Primary wave II may rally in a counter-trend Major wave B while some of the foreign indices are making new bull market highs. This would suggest a Primary wave II consisting of three Major waves ABC. And, this is exactly how we have been counting this US correction.
MEDIUM TERM: downtrend low at SPX 1041
After the April 26th uptrend high at SPX 1220 OEW confirmed a downtrend the following week. The first decline we have labeled as an abc Intermediate wave A into the flash low at SPX 1066. Then after a sharp Intermediate wave B rally to SPX 1174, the market declined in another ABC double bottoming at the OEW 1041 pivot. We have tentatively labeled that June 8th low as Major wave A. With positive divergences on all timeframes up to and including the daily chart, and a weekly oversold condition, the market rallied. This monday the SPX gapped up to 1131, from the 1042 low, completing that short term rally. We tentatively labled that three wave rally Intermediate wave A of Major wave B. For the rest of the week the market sold off hitting a low of SPX 1068 on friday. This should be Intermediate wave B of Major wave B unfolding now. Should the foreign markets start to rally and confirm uptrends this week, a rising Intermediate wave C should be underway next.
Overall it does appear that the US market, along with China, Japan and Spain, will remain weaker than most international markets. While most foreign markets are rallying these markets will probably just experience a counter-trend rally before making lower lows. In the US we’re expecting an ABC Primary wave II consisting of three Major waves. Major wave A bottomed at SPX 1041, Major wave B is underway now, and Major wave C will probably bottom at the OEW 944 pivot.
Support for the SPX remains at 1058 and then 1041, with resistance at 1090 and then 1107. Short term momentum continues to display a positive RSI divergence and now an oversold daily condition. After the Intermediate wave A abc rally from SPX 1042 to SPX 1131 completed with a 50% retracement of the entire Major wave A decline. We projected three fibonacci retracement levels for Intermediate wave B. They all held support, but just for one day. The current low of SPX 1068 retraced 63 points of an 89 point rally, or 70.7%. This is an uncommon fibonacci retracement level, the inverse of the square root of 2, but a recognizable one. While there could be some further weakness early in the week, testing the OEW 1058 pivot range, Intermediate wave B should be bottoming now. The key factor will be the overnight actvity in the foreign markets. Best to your trading!
The Asian markets were mixed on the week for an average loss of 0.3%. India’s BSE and Hong Kong’s HSI are in confirmed uptrends.
The European markets were all lower on the week for a loss of 3.4%. Only Germany’s DAX is in a confirmed uptrend.
The Commodity equity group were mixed for an average loss of 0.9%. No confirmed uptrends here yet.
Bonds gained 0.2% on the week as bond prices continue to uptrend. The 10YR rate dropped to its lowest level in over one year at 3.07%. The 1YR rate is only three basis points above its Dec 09 record low of 0.26%. Rates across the board remain cheap.
Crude shot up on friday to gain 1.2% for the week. This has been quite a choppy market for the past nine months with an upward bias.
Gold sold off on monday but recovered for only a 0.1% loss on the week. While the uptrend remains in force the action has been quite choppy since the Minor wave 4 low in mid-May. The daily 34EMA looks like a good place for a traders sell stop.
The USD (-0.4%) didn’t rally much off the recent low and may be only days away from confirming a downtrend.
Monday’s Personal income/spending reports at 8:30 kick off a busy week. On tuesday we have Consumer confidence, and then on wednesday the ADP and the Chicago PMI. Thursday we have the weekly Jobless claims, ISM manufacturing, Construction spending and Auto sales. Then on friday the often volatile Payrolls report and then Factory orders. Currently there is nothing on the FED calendar except the Foreign exchange rates report on thursday. Best to your weekend and week!