REVIEW

The big story of the week was the surprising rally in the equity markets. After many of the indices had already confirmed downtrends, the market suddenly reversed course on some earnings announcements. Bear markets can be a bear. For the week the SPX/DOW gained 7.2%, and the NDX/NAZ was +7.5%. The Asian markets gained 4.9%, Europe was +7.5% and the Commodity equity markets rose 6.1%. Bonds lost 2.0%, Crude rallied 7.8%, Gold gained 2.7% and the USD/Yen dropped while the Euro/Cdw gained. On the economic front, retail sales nudged up to +0.6%, jobless claims modestly improved to 522K, as did housing starts and the home builders index. Yet the Empire state index, the Philly FED, industrial production all remained in negative territory, and both the PPI (+1.8%) and CPI (+0.7%) spiked higher.

LONG TERM: bear market

While stock markets worldwide appear to have taken on a life of their own, economic activity continues to remain lackluster at best. Certainly economies are recovering from the credit freeze during the fourth quarter of 2008 and first quarter of 2009. Bank balance sheets, due to accounting rule changes, exhibit enormous cash reserves, but lending remains tight. The housing market, however, and the commercial real estate market show no signs of improvement. Companies continue to downsize and outsource employment to improve their bottom line. In a consumer driven economy, 70% of GDP, the foundation for a sound economic recovery is on shakey ground.

Technically, bear markets of this degree unfold in three Primary waves: ABC. The first Primary wave (A) started at the bull market high of SPX 1576 and declined to Mar 09 when it hit 667. The second Primary wave (B) moved 43% higher from that level and hit SPX 956 in June. When that zigzag wave pattern looked to be completing we cautioned that Primary wave B may be ending, and Primary wave C would be next. From that high the SPX declined to 869 on July 8th. At that time most of the indices we follow were also in confirmed downtrends. However, during the past few months we have maintained an alternate count on the DOW charts. This count suggested that Primary wave B would take on the form of three trends, and not just one. In either case we determined that the risk outweighed the reward at the SPX 956 level and urged caution in the weeks/months ahead.

Historically, there are three periods that bear markets of this degree have occurred: 1929-1932, 1937-1942 and 1973-1974. In all instances, the bear markets have lasted at least 23 months. At the Mar 09 low this bear market was 17 months old. All three also exhibited at least a 50% decline, with the first two displaying at least a 50% decline during Primary wave A. The SPX dropped 58% in the Mar 09 low. Also in the first two instances the Primary B wave that followed the decline lasted at least five months. This Primary B wave is in its fourth month as it rallies from the Mar 09 low. Everything still appears to be in order for the bear market to resume once this rally concludes.

MEDIUM TERM: downtrend may have ended, NDX/NAZ uptrending

Since Primary wave A took the form of a detailed zigzag: Major A Mar 08 (SPX 1257), Major B May 08 (SPX 1440), Major C Mar 09 (SPX 667). We expected Primary wave B to also take the form of a zigzag. From the Mar 09 low we counted an A wave to SPX 833, a B wave to SPX 780, and then a detailed C wave to SPX 956. This looked like the zigzag we expected even though the 43% rally fell short, in time and price, of the typical Primary B wave rallies. We may have erred on the side of caution. After the SPX 956 high a downtrend was confirmed, confirming that a significant wave had been completed. As noted, we maintained the alternate DOW count just in case Primary wave B extended. At the recent low of SPX 869, the downtrend had retraced about 30% of the previous uptrend. By tuesday of this week everything still appeared to be in order as the market rallied to SPX 906. Since the first decline to SPX 889 from the 956 high retraced back to 932, at the 935 OEW pivot. The second decline to SPX 869 could retrace back to about the OEW 912 pivot. On wednesday, however, the market gapped up at the open to 914 and continued to rally. Clearly something else was at work. By the end of the week the SPX had rallied to 944, and the growth sectors (NDX/NAZ/SOX/XLK) had already confirmed new uptrends. We have reviewed the NDX/NAZ charts over the past seven years. There have only been two occassions when the NDX/NAZ have deviated from the SPX/DOW, and both times they lagged. Probabilities favor that the NDX/NAZ are leading this market, and the SPX/DOW will confirm uptrends soon.

SHORT TERM

Support for the SPX is now at 935 and then 912, with resistance at 961 and then 990. Short term momentum was extremely overbought during the rally and is beginning to back off some. The rally from SPX 869 has been quite strong. In fact it generated one of the three best up/down volume days since the bull market. Also the NYAD has made a new momentum high, while the VIX continues to trend lower. Should the SPX/DOW confirm the uptrend we will then make some estimates for the ongoing unfolding of Primary wave B. Generally, it should be shorter than the previous uptrend in price and time. Best to your trading!

FOREIGN MARKETS

The Asian markets rallied 4.9% on the week with India's BSE leading (+9.2%) and Japan's NIK lagging (+1.1%). No uptrends confirms yet.

The European markets rose 7.5% with the usual Germany DAX leading (+8.8%). No uptrend confirms.

The Commodity equity markets rallied 6.1% with Canada's TSE leading (+6.4%). No uptrend confirmations.

COMMODITIES

Bonds dropped 2.0% on the week and still appear to be uptrending.

Crude rallied 7.8% this week while remaining in a downtrend.

Gold gained 2.7% this week and may have bottomed recently at $905, but no uptrend confirmation yet.

The Euro (+1.2%) and USD (-0.9%) have been going sideways for more than a month. The USD appears to be weakening.

NEXT WEEK

The FED is a lot more active this week than economic reports being released. On monday Leading indicators will be reported at 10:00. Then we have to wait until thursday before the weekly Jobless claims are released, along with Existing home sales and the UofM Consumer sentiment reading. On tuesday FED chairman Bernanke gives monetary policy testimony to the Congress, and then on wednesday to the Senate. On thursday FED governor Tarullo gives banking regulatory testimony to the Senate. Then on sunday FED chairman Bernanke is hosting a town hall event at the Kansas City FED. Best to your week!

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