The pullback from new bull market highs continued for a second week. After a 16.4% gain over the past, nearly, four months. The market has pulled back 3.0% over the past two weeks. Quite normal for this stage of the uptrend. For the week the SPX/DOW were -1.2%, and the NDX/NAZ were -2.1%. Asian markets were flat, European markets lost 4.1%, and the DJ World index lost 1.8%. Positive economic reports continue to outpace negative reports, this week 11 to 5. On the downtick: Q2 GDP, durable goods orders, pending home sales, the Chicago PMI and consumer sentiment. On the uptick: Case-Shiller, consumer confidence, FHFA housing prices, new home prices/sales, personal income/spending, PCE prices, the M1 multiplier, the WLEI and the weekly jobless claims improved. Next week we get a look at the monthly Payrolls report, ISM, Auto sales and Consumer credit.
LONG TERM: bull market
This Cycle wave  bull market continues to unfold as expected. While many fundamentalists and technicians have warned investors of many potential problems for the economy and stock market. The FED has continued to fight the deflationary secular cycle with an accommodative liquidity cycle. Thus far, the FED, the stock market, and government deficits continue to help the economy recover. While several of the highly watched economic indicators have recently shifted into contraction mode, or have been softening. Our leading economic indicator, the WLEI, has been rising since Q4 of 2011. This suggests to us, with nearly 50 years of historical data, the economy is expanding again.
The weekly chart displays our OEW labeling of this bull market. We are expecting the typical five Primary wave advance for a Cycle wave. Primary waves I and II completed in 2011 at SPX 1371 and SPX 1075 respectively. Primary wave III has been underway since that low. Primary wave I divided into five Major waves with a subdividing Major wave 1. Primary wave III appears to be following the same path as its Major wave 1 also subdivided into five Intermediate waves. Major waves 1 and 2 completed in 2012 at SPX 1415/22 and SPX 1267 respectively, and Major wave 3 has been underway since that low.
Currently, the MACD continues to rise suggesting further upside progress for Major wave 3. Yet, the RSI has declined some during the recent pullback. This suggests the next series of new bull market highs may create a negative divergence. Negative divergences like this have signalled the top of most of this bull market’s uptrends. After Major wave 3 concludes, the market should experience a Major 4 correction. Then another uptrending Major wave 5 to complete Primary wave III. After a Primary wave IV correction, a rising Primary wave V should take the stock market to new highs, possibly/probably, all time highs to end the bull market in mid to late 2013.
MEDIUM TERM: uptrend
This uptrend, Major wave 3, began in early June at SPX 1267 and rose to a high of SPX 1475 by mid September. We have been labeling this uptrend as five Intermediate waves with a subdividing Intermediate wave iii. The uptrend was a bit choppy during July, but eventually resumed its impulsing advance by the end of that month.
We have labeled Int. wave i @ SPX 1363, Int. wave ii @ SPX 1309, Int. wave iii @ SPX 1475, and Int. wave iv underway, or having completed @ SPX 1431. Assuming an Int. wave iv low @ SPX 1431 we can now project some Fibonacci targets for Int. wave v. At SPX 1527-1534, Int. v = Int. i and 0.618 Int. iii. We also have a long term OEW pivot at SPX 1523, and these levels are within its upper range. At SPX 1586-1606 Int. v = Int. iii and 1.618 Int. i, plus Major wave 3 = Major wave 1. These levels represent all time new highs in the stock market. There are also two other OEW pivots before the market potentially reaches all time new highs: OEW 1552 and OEW 1576. Overall, the potential to reach SPX 1600 is possible, but the market will have to overcome a lot of resistance in the process. For now, once the 1499 pivot is cleared, we will look for an uptrend high at the 1523 pivot. Medium term support is now at the 1440 and 1386 pivots, with resistance at the 1499 and 1523 pivots.
Short term support is at the 1440 pivot and SPX 1422/27, with resistance at SPX 1463/64 and the 1499 pivot. Short term momentum ended the week just below neutral. The short term OEW charts remain negatively biased with the swing level around SPX 1447.
During this entire uptrend we have observed alternation between second and fourth waves down to the Minute degree. Naturally we should expect to see alternation between the largest degree waves within this uptrend, Int. waves ii and iv, and we do. Int. wave ii lasted only four trading days and was a simple zigzag. Thus far Int. wave iv has lasted eight trading days, and at the SPX 1431 low it appears to be a double zigzag. If it did not complete at wednesday’s low then a more complex pattern is possible, as is a possible retest of SPX 1431 or a slightly lower low. Thus far we have not received a signal from our short term charts that would suggest the pullback is over. Should the SPX exceed thursday’s 1450 high we are likely to get that signal. Best to your trading!
The Asian markets were quite mixed on the week and ended flat. All indices are in uptrends, except improving China and Singapore.
The European markets were all lower on the week for a 4.1% loss. France, Italy and the Stox may be in downtrends.
The Commodity equity group were all lower as well for a net loss of 2.3%. All three indices remain in uptrends.
The uptrending DJ World index lost 1.8% on the week.
Bond prices have been downtrending since early June in quite a choppy pattern. They gained 0.6% on the week. Bond yields have been rising since the late July 1.39% low, but are close to confirming a downtrend.
Crude sold off to $89 this week after reaching an uptrend high of $100 in mid-month. Crude lost 1.1% on the week, and any additional selling could confirm a downtrend.
Gold has been uptrending since late June. This week it failed to exceed its uptrend high at $1790 and lost 0.1%.
The USD downtrended from mid July @ DXY 84 to mid September @ DXY 79, became quite oversold, and has since rebounded. Still downtrending, but it gained 0.8% on the week.
Monday kicks off the economic week with ISM manufacturing and Construction spending at 10:00. Tuesday we have monthly Auto sales. On wednesday: the ADP index, ISM services, and the FOMC minutes. Thursday: weekly Jobless claims and Factory orders. Then on friday the monthly Payrolls report and Consumer credit. The FED comes out of its hiatus with a speech from FED chairman Bernanke on monday at 12:30. On friday FED governor Duke gives a speech at the NY FED. Best to your weekend and week.