REVIEW

Great election news for India resulted in one of the biggest daily gains in Sensex history: +17% on monday. The news helped markets worldwide rally into midweek. The markets, however, ended about unchanged on the week. The SPX/DOW were +0.30%, and the NDX/NAZ were +0.65%. The Asian markets, ex-India (+14.1%), were -0.1%. Europe was +2.1%, and the Commodity equity markets were +3.0%. Economic reports were sparse. Housing starts hit a 50-year low: 458K v 525K, weekly Jobless claims were 631K v 643K, but Leading indicators rose to +1.0% v -0.2% and the Philly FED reported manufacturing -22.6% v -24.4%. The other highlights for the week was the drop in the USD (-3.6%) and the Bond market (-1.9%), and the rallies in Crude (+8.2%), Gold (+2.8%) and the Euro (+3.7%).

LONG TERM: bear market

In October 2007 the SPX topped at 1576 and the bear market began. The market then declined in five Intermediate waves to SPX 1257 by March 2008 to complete Major wave A. A rally to SPX 1440 by May 2008 completed Major wave B. This was followed by another five Intermediate waves down into March 2009 at SPX 667 to complete Major wave C and Primary wave A. Since bear markets of this degree unfold in an ABC pattern, we then expected a strong Primary wave B rally before the dreaded Primary wave C decline. Estimates for the Primary wave B rally, SPX 1122 a 50% retracement or SPX 1001 a 50% rally, were based upon historical references. Thus far the SPX has rallied from 667 to 930, or 39%. This uptrend has been the largest gainer in both point and percentage terms since the bear market began, which qualifies it as a Primary B wave. Most of the foreign markets have done much better from their lows: India +85%, Brazil +79%, Hong Kong +66%, China +61%, and Germany +41%. Canada has also risen 39%, but the rest of our foreign markets have underperformed: Japan +35%, the UK +31% and Australia +29%. With the average gain at 47% it again qualifies as a Primary wave B rally. Looking ahead. When Primary wave C begins, there should be another series of waves, similar to Major waves A and C, that will either retest the lows at SPX 667 or make lower lows for the bear market. Currently, we're expecting this bear market to end in March 2010. Therefore, as we noted this week, it's time to get cautious on this market. It is not a new bull market, only a bear market rally.

MEDIUM TERM: uptrend, but caution is advised

This uptrend started nearly three months ago at SPX 667. The first rally was quite strong, SPX 833, and the pullback 53 points. We marked this as waves A and B. The next rally was to SPX 876 and the pullback, 49 points, overlapping the first rally. We marked this as waves 1 and 2 of wave C. Another rally pushed the SPX to 930 and the pullback was 51 points to SPX 879. Notice the symmetry in the pullbacks and this last one did not overlap the previous rally. We marked these waves as 3 and 4. This week the SPX could only rally to 925, the DOW made a new high, before a pullback to 880 (45 points). This may have been a fifth wave failure in the SPX. During this uptrend the market has rallied and the pullbacks have been spaced about three weeks apart. Now, we have two pullbacks back to back. The character of this uptrend is changing. When we count the rally to SPX 833 and pullback to 780 as waves A and B. Then count five waves up to the recent highs. We have a potentially completed ABC from the SPX 667 low. Unfortunately, the DOW technicals support this view. There's a negative RSI divergence on the daily charts at the recent high, and this market has reached its most overbought level of the entire bear market on the weekly charts. A completed ABC suggests one of two scenarios. Either Primary wave B has ended, or only Major wave A of Primary B has ended. We are going to maintain both of these counts on the SPX and DOW charts respectively. Under either scenario caution is advised at current levels.

SHORT TERM

Support for the SPX remains at 848 and then 789, with resistance at 912 and then 935. Short term momentum hit neutral on friday and then headed lower. Under the count posted above, when the SPX drops below 876 an overlap will occur. This will be the first sign that the ABC pattern from the SPX 667 low has completed. Should the market then break below the 848 pivot the uptrend is likely over. For the past three weeks the market has gone sideways: 883-930, 879-919 and 880-925. When this type of action occurs at a low it's considered consolidation. But at a high it's resistance. At best, a correction from here could be followed by another uptrend to complete Primary wave B at the appropriate levels. At worse, a correction from here would start Primary wave C. Since we already have over 35% in gains, whatever appropriate action one would deem defensive is suggested. 

FOREIGN MARKETS

The Asian markets were generally flat this week with India the exception +14%. All but Hong Kong are displaying negative RSI divergences.

The European markets were +2.2%, most of it the DAX, which also displays a negative RSI divergence.

The Commodity equity markets were +3.0%. Both Brazil and Canada display negative RSI divergences.

Caution appears to be the theme.

COMMODITIES

Bonds dropped 1.9% this week. Long term rates are rising while short term rates remain near their lows. Downtrend continues.

Crude rallied 8.2% this week. But it's uptrend is displaying a negative RSI divergence.

Gold rose 2.8% this week, and Silver broke out above its February highs. These uptrends continue.

The USD fell 3.6% in one week and the Euro rallied 3.7%. Support for the USD appears to be at 76.

NEXT WEEK

Monday is a holiday in the States. Tuesday starts the week and end of month with Case-Shiller housing prices and a Consumer confidence reading. On wednesday, FHFA reports its doctored home price report, and Existing home sales. Thursday is the weekly Jobless claims, Durable goods orders and New home sales. Then on friday, month end, the first Q1 GDP revision, Chicago PMI and another Consumer sentiment reading. As for the FED, they have nothing on the agenda. The Q1 GDP revision is probably quite negative. We've read estimates as low as -9.0%. Best to your week!

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