weekend update

REVIEW
Despite a surge in Q3 GDP (+3.5%) and generally otherwise neutral economic reports the US stock markets plunged: SPX/DOW -3.3% and the NDX/NAZ -5.0%. This week’s drop was the largest since the week of May 11th in the SPX/DOW, and the week of Mar 2nd in the NDX/NAZ. There were improving economic reports in housing prices, durable goods orders, the Chicago PMI and consumer sentiment. The weekly jobless claims were neutral, and declining reports in consumer confidence, new homes sales, personal income and consumer spending. In other markets Asia was -3.9%, Europe -3.7% and the Commodity equity markets were -5.7%. Bonds gained 0.9%, Crude lost 4.4%, Gold slipped 0.9%, and the USD (+1.2%) rallied against most currencies except the JPY (+2.2%). In the week ahead ISM, Auto sales, the Payrolls report and the FOMC suggests another volatile week.
LONG TERM: bear market
A five year bull market unfolded between Oct 02 and Oct 07. During that period of time the SPX rose from 769 to 1576 or 105%. Then the SPX entered a bear market, where it has remained, (in OEW terms), since that time. Please recall I have noted that the months of Mar and Oct have been creating significant turning points for several decades. From the SPX 1576 Oct 07 high the market dropped to SPX 667 in Mar 09. A total market loss of 58%, wiping out the entire five year gain in just 17 months. This 50% plus loss confirmed that this wasn’t just a common bear market, but one of Cycle or even Supercycle proportions. Historically there were only three other occassions in the past century when the market lost about this much value: 1929-1932, 1937-1942 and 1973-1974. These are the three Cycle waves of the past century. Cycle waves typically unfold in three large waves. We label them Primary waves A, B and C. Primary wave A usually creates a 50% loss in total market value. Primary wave B usually retraces 50% of the entire decline, and many claim a new bull market is underway. Then Primary wave C resumes the bear market and bottoms near the Primary wave A low or much lower. These types of bear market can last anywhere from 23 months to 60 months.
During the Oct 07 to Mar 09 decline Primary wave A formed a detailed zigzag (5-3-5). We labeled the zigzag as three Major waves: A SPX 1257, B SPX 1440 and C SPX 667. The details can be found on the SPX weekly chart. Within a few days of that low, we suggested a completed wave structure for Primary wave A, and projected the potential for a 50% retracement Primary wave B (SPX 1122), which is between our two long term OEW pivots: SPX 1107 and SPX 1179. Last week Primary wave B hit the SPX 1107 pivot for the first time after a seven month rally. On Oct 19th the SPX hit 1100, and on Oct 21st it hit SPX 1101. This week the market turned sharply lower. The wave structure during the Primary wave B advance took the form of a complex zigzag. Zigzags are quite common in bear markets. We again labeled this zigzag with three Major waves: A SPX 956, B SPX 869 and C SPX 1101. At the current high the SPX had retraced 48% of the entire Primary wave A decline. History, when interpreted correctly and truthfully certainly repeats. Once OEW confirms a downtrend, which should be soon, the most logical objective would be for the SPX to retest Major wave B at SPX 869. This would only complete the first wave down of Primary wave C. It’s still a bear market.
MEDIUM TERM: uptrend in jeopardy
As noted above Primary wave B unfolded in three Major waves to complete a complex zigzag. What made it complex was that both uptrends, Major waves A and C, unfolded internally as double zigzags. Bear market rallies are certainly not bull market impulse waves. Bear markets teach the finer points, with a myriad of complex patterns, of the Elliott Wave. Bull markets then allow the EW technician to put that knowledge to maximum use. The details of this complex Primary wave B zigzag can be found on the SPX daily chart. Both Major waves A and C were seven wave structures. The first three waves, a 5-3-5 zigzag, we labeled as Intermediate wave A. Intermediate wave B then became the fourth wave, and the next three waves, another zigzag, completed Intermediate wave C and each Major wave. Notice the symmetry between Major waves A and C. Also notice the negative divergences at every Intermediate wave high on the daily chart, and the negative divergence at both Major waves on the weekly chart. When one calculates the fibonacci relationships between the waves, as we noted last weekend, the following relationship stood out. During Major wave A, Int. C = 0.618 Int. A at SPX 956 and during Major wave C, Int. C = 0.618 Int. A at SPX 1097. It certainly appears Primary wave B should have concluded at SPX 1101.
SHORT TERM
Support for the SPX is at 1018 and then 990, with resistance at 1041 and then 1061. Short term momentum was oversold at the close on friday and displaying a slight positive divergence. Each of the rallies during both Major wave A and C were five wave structures. The early ones in Major A were diagonal triangles, and then after that simple impulse waves. At the early October SPX 1020 low we anticipated one more five wave rally to complete the entire Primary wave B structure. It unfolded exactly as labeled on the SPX 60 minute chart. When negative divergences accompanied that fifth wave on all timeframes, from the very short term up to the weekly charts, and it ended at a long term OEW pivot. We alerted that an uptrend top may be at hand to conclude Primary wave B. Every uptrend, during this entire bear market, has ended at an OEW pivot. Now that the decline appears to be underway and is impulsing downward, we are starting to get downtrend confirmation from other indices, sectors and indicators. Currently Spain’s IBEX, Canada’s TSX and Japan’s NIKK are in downtrends. This is the first downtrend for Spain since the Mar 09 low. As for the sectors: Housing HGX, Banking KBE, Utilties XLU and the Semiconductor index SOX are in downtrends. This is the first downtrend in the XLU since Mar 09. Along with various stocks that are in downtrends, see pages 15-20 in the link below, we have observed the following indicator signals. The put/call ratio hit its highest daily level since Nov 08, the advance/decline ratio topped with a negative divergence, and the UP/DN volume hit its highest weekly level since 2000. The popular VIX is now in an uptrend, and as Matt in our OEW group pointed out, today was the largest one day surge in over five years. The current 30 reading implies a 2% daily volatility range. The short term count remains unchanged: wave 1 SPX 1074, wave 2 SPX 1096 and wave 3 possibly ending at SPX 1034. The internals of wave 3 is a nice five wave structure: wave 1 SPX 1075, wave 2 SPX 1092, wave 3 SPX 1042, wave 4 SPX 1067 and wave 5 possibly SPX 1034. Once the downtrend is confirmed by OEW we will apply the proper wave labeling with wave degree etc. on the charts. Best to your trading!
FOREIGN MARKETS
The Asian markets lost 3.9% on the week, all indices were down, and the biggest loser was India’s BSE (-5.4%). NIKK in confirmed downtrend.
The European markets lost 3.7% on the week, all down also with the biggest loser Germany’s DAX (-5.7%). IBEX in confirmed downtrend.
The Commodity equity markets lost 5.7% on the week, again all down with Russia’s RTSI (-7.7%) the biggest loser. TSX in confirmed downtrend.
COMMODITIES
Bonds gained 0.9% this week. Bond yields remain in an uptrend, but not confirmed by bond prices yet.
Crude lost 4.4% on the week, but remains in an uptrend. Crude was quite overbought recently so it could pullback some more.
Gold lost 0.9% in a volatile week. Should be in correction mode along with Silver (-7.7%), but should hold the recent low at $1027 spot.
The USD gained 1.2% for its best week since June 1st. That’s the last time the EURUSD (-2.0%) went into a correction. The JPYUSD was +2.2%.
NEXT WEEK
A very busy week ahead, which will probably add to the volatility. On monday, ISM manufacturing and Construction spending at 10:00. Tuesday, Factory orders and Auto sales. Wednesday, ADP employment index and ISM services. Thursday, the weekly Jobless claims, Productivity and Unit labor costs. Then of friday, Non-farm payrolls, the Unemployment rate and Consumer credit. Yes, it’s FOMC week too. On monday FED associate director Greenlee testifies before Congress at 11:30, then FED governor Tarullo gives a speech at the UofMD at 3:00, and the Foreign exchange rates are reported. On tuesday the FOMC meeting begins and on wednesday the FED releases their statement. Best to your weekend and week!

About tony caldaro

Investor
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