weekend update

REVIEW

It was generally a good week all around for the stock market and the economy. FED chairman Bernanke even gave a speech after the close on friday: http://www.federalreserve.gov/newsevents/speech/bernanke20100924a.htm. Economic reports were mostly on the positive side: housing starts, building permits, existing/new home sales, BEA leading indicators and the WLEI all rose. On the negative side we had a decline in the FHFA price index and durable good orders; weekly jobless claims rose and the NAHB housing index was flat(lined). The equity markets, at least in the US, did quite well. The SPX/DOW were +2.25%, and the NDX/NAZ were +3.15%. Asian markets, many of which were closed, gained 0.1%, Europe gained 1.0%, and the Commodity equity group gained 1.2%. Bonds were flat, Crude gained 2.7%, Gold added 1.7%, and the USD dropped 2.5%. Next week will be highlighted by the next revision to Q2 GDP, the Chicago PMI, ISM and Auto sales.

 

LONG TERM: bull market

For several decades, many of us in the Elliott Wave sector of technical analysis, and others now, have been claiming that the markets are a reflection of mass investor psychology. In OEW we take this concept one step further and suggest that the markets are a quantitative view of the human collective consciousness. Considering that there are over six billion people on this planet, and not one is identical to another. It is certainly quite a large collective of, needless to state, varying opinions. The markets are forced to move by the strongest, and most committed, of these varying opinions.

This week the US equity markets broke out of a multi-month trading range to the upside. Yet, like people observing a traffic accident, there are numerous opinions as to what has just occurred. We, all six billion of us, go through life with different biases. Most of us are positive and some are negative. Yet even this simple definition can fluctuate from time to time based upon ones current circumstances. Some of us look for the best in a situation, others the worse. For many of us the glass is either half full, or half empty.

When attempting to view and objectively analyze the human collective consciousness, mass investor psychology. One needs to put aside one’s biases and view market action quantitatively. In reference to the traffic accident example. This is like observing the accident with an unbiased mindset, noting the facts of the incident, and then entering them into short term memory, and then long term memory if asked to be a witness. Unfortunately, many people carry their biases around where ever they go. And, they immediately start talking about a sudden event, such as an traffic accident, before they have had a chance to analyze, and record in their minds what actually occurred. This is the reason why one can ask ten different people and get ten different accounts. In our continuing attempt at an unbiased view we now cover the markets.

 

In our quantitative approach to observing the markets we use two basic criteria. What is the long term trend, and is it impulsive or corrective. The rationale is quite simple. When the long term trend is up and the waves are impulsing higher – it’s a bull market. When the long term trend is up and the waves are corrective – it’s a bear market rally. When the long term trend is down it is always a bear market. True bull markets, therefore, can only occur when both variables are positive. All other times it’s a bear market. Currently the long term trend is UP for most equity markets worldwide. And, the advance during this uptrend has been impulsive. Therefore, our conclusion is the obvious: it is a bull market! Certainly we are aware of the fundamental economic problems, both near term and long term. We have observed them as they have unfolded, day by day, for quite some time. Bull markets, however, climb a wall of worry. Now to the specifics.

 

This bull market began in Mar 2009 at SPX 667. Since then the SPX has advanced in five impulsive waves into the April 2010 high of SPX 1220. We labeled that high Primary wave one of a five Primary wave bull market. Primary wave one subdivided into five Major waves as follows: Major 1 SPX 956 Jun09, Major 2 SPX 869 Jly09, Major 3 SPX 1150 Jan10, Major 4 SPX 1045 Feb10 and Major 5 SPX 1220 Apr10. Primary wave two then started to unfold after the Apr10 high. At the beginning of Jly10 the SPX bottomed at 1011, ending Primary wave two. This correction of 17%, 1220-1011, took the form of a corrective complex zigzag. In bull markets uptrends are impulsive, and downtrends (corrections) are corrective. After this Primary wave two low, Primary wave three began.

The first uptrend from the SPX 1011 low, Major wave 1, has been advancing in spurts, rather than a smoothe and gradual rise. This is the same chartacteristic we observed during Major wave 3 of Primary wave one. This suggests that the current uptrend will take about six months to unfold, will continue to be somewhat choppy, and will make new highs for the bull market when its concludes. Our initial upside targets projected just after the July10 low were SPX 1176, (if the advance was weak), and SPX 1291 (if the advance was stronger). We are now upgrading the upside target to the OEW pivot at 1313 while maintaining the six month timespan. Details in a special report on sunday.

 

MEDIUM TERM: uptrend

As noted previously this first uptrend off the Primary wave two low at SPX 1011 has been a bit choppy. The first impulse wave up unfolded in a clear five waves into an early August high of SPX 1129. It was a fairly good kickoff, but most of the advance occurred in the first two weeks. After the SPX 1129 Intermediate wave one high this market did something it had not done before in this bull market. It pulled back all the way to major support at the OEW 1041 pivot, a pullback of 7.9%. This nearly triggered a downtrend confirmation. Then after a few days of basing, the uptrend took off again in early September to higher highs this week. We labeled the pullback Intermediate wave two. Intermediate wave three has been underway since the SPX 1040 low.

Since this uptrend is anticipated to be Major wave 1 of Primary wave three, we are expecting it to unfold in five Intermediate waves. Intermediate wave one concluded at SPX 1129, Intermediate wave two ended at SPX 1040, and Intermediate wave three is currently underway. Primary wave three, as a whole, should unfold like Primary wave one – with five clearly defined Major waves (trends). Currently, it appears Intermediate wave 3 has only completed Minor waves 1 and 2. Minor wave 1 SPX 1149, Minor wave 2 SPX 1123, and Minor wave 3 underway now. The technicals of the major indices also support this view. Upside momentum on the daily/weekly/monthly charts are rising and not overbought. Most of the nine SPX sectors are in confirmed uptrends, along with nearly every one of the 14 foreign indices we track. This uptrends looks good.

 

SHORT TERM

Support for the SPX is now at 1146 and then 1136, with resistance at 1168 and then 1176. Support has not been this high since, before and after, the ‘flash crash’ in early May. Short term momentum displayed a slight positive divergence at thursday’s low and is now slightly overbought. Recently, short term momentum stayed above oversold for nearly three weeks. This was the longest overbought condition, of this type, since Major wave 3 (Jly09-Jan10). That uptrend also moved higher in spurts, with many pullbacks along the way, as it worked its way higher from SPX 869 to SPX 1150. Major support is way back at the OEW 1041 pivot, with important support at the OEW 1090 swing pivot. On the upside there is little resistance between the OEW 1146 pivot and the 1168 pivot, except for the SPX 1150 level. Above 1168 there are a couple of pivots relatively close together. The last time the market was that high, in March to April, it had some difficulty getting through those pivots. Best to your trading! 

 

FOREIGN MARKETS

Asian markets were mixed on the week for a net gain of 0.1%. All remain in confirmed uptrends except Japan’s NIKK, but China’s SSEC has weakend recently.

European markets were mostly higher on the week for a net gain of 1.0%. All remain in confirmed uptrends.

The Commodity equity group were all higher on the week for a net gain of 1.2%. All remain in uptrends.

The Dow Jones world index gained 2.2% on the week and remains in an uptrend.

 

COMMODITIES

Bonds were flat on the week as the uptrend is under some selling pressure. 

Crude has been in a downtrend but is starting to show some signs of life, +2.7% on the week.

Gold continued its uptrend to all time highs as it touched $1300, +1.7% on the week.

The USD unravelled this week after the FED’s FOMC meeting, -2.5% on the week. The EUR surged 3.5%, and the YEN rallied 1.8%.

 

NEXT WEEK

A somewhat busy economic calendar this week as the end of month/quarter gets underway. On tuesday the Case-Shiller home price index and Consumer confidence. Then on thursday, the Q2 GDP revision, weekly Jobless claims, and the Chicago PMI. On friday, Personal income/spending, PCE prices, UofM Consumer sentiment, Construction spending, ISM manufacturing and Auto sales close out the week. As for the FED. Chairman Bernanke is on the stump again for testimony and a speech on thursday. The day of the Q2 GDP revision. It’s probably not a good number. Estimates are at +1.6%. In the morning the chairman gives testimony in the Senate, and then in the afternoon a speech at the FED in Wash, DC. This market is always interesting. Best to your weekend and week.

CHARTS: http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1606987