REVIEW

Despite a new downtrend low on tuesday at SPX 1041. markets worldwide had a mostly positive week. US economic reports were generally positive as well. Existing/new homes sales rose, as did consumer sentiment/confidence. Durable goods orders rose, along with personal income, and the weekly jobless claims declined. Case-Shiller home prices, however, continued to decline. Consumer spending was flat, Q1 GDP was revised lower, and both the Chicago PMI and the weekly LEI came in lower but still in expansion mode. Overall it was a good week economically, albeit not as robust as in recent months. For the week the SPX/DOW were mixed, the NDX/NAZ were +1.45%. Asians markets gained 1.9%, European markets were +1.6% and the Commodity equity group was +2.7%. Bonds lost -0.5%, Crude soared 5.6%, Gold rallied 3.2% and the USD was +1.6%. The upcoming week’s economic reports will be centered around the friday payrolls report, ISM and the monthly auto sales. Monday is a holiday in the US.

LONG TERM: bull market

When reviewing the charts this weekend we find that ten of the fourteen world markets we follow are displaying five wave bull market patterns from their late 2008/early 2009 bear market low. This does not occur in bear market rallies. Market breadth, in the US, recently hit an all time high during the latest uptrend. Bull market tops are usually accompanied by a negative divergence in market breadth, i.e. 1987, 2000 and 2007, not new highs. Some of the six economically sensitive SPX sectors start to display negative divergences, versus the SPX, prior to impending bull market tops. Currently only the XLU (utilites) failed to make a new high during the latest uptrend. Therefore we have to conclude that equities are in a bull market, they have not topped, and they currently display no signs of topping in the near future. Supporting this technical observation is the fundamental view of the Leading Economic Indicators (LEI). Typically the LEI drops below 50% for some period of time before the economy is about to enter a contraction. It is currently well off its highs but still reading an expanding 55.1%. Overall we see a stock market that is in a sharp correction during an ongoing bull market, with an economy that has slowed down but displaying no signs of a pending recession.

The most obvious count for the US market is posted on the SPX charts. The bear market bottomed in Mar 09 at SPX 667. After that low there were five waves up to complete Primary wave I: Major wave 1 SPX 956 Jun09, Major wave 2 SPX 869 July09, Major wave 3 SPX 1150 Jan10, Major wave 4 SPX 1045 Feb10, and Major wave 5 SPX 1220 Apr10. Currently we are in a steep Primary wave II correction. This count is also supported by the other three major US indices: the DOW, NAZ and NDX.

MEDIUM TERM: downtrend low at SPX 1041

When this correction was confirmed in the beginning of May and then broke the customary 10% threshold (SPX 1098) we made several support level calculations. The first was the OEW 1058 pivot, the SPX 1066 flash low of May 6th. Second was the OEW 1041 pivot, the actual SPX 1045 low of Major wave 4. The next three are all fibonacci retracement relationships to Primary wave I: the OEW 1007 pivot a 38.2% retracement, the OEW 944 pivot a 50.0% retracement, and worse case the OEW 876 pivot a 61.8% retracement. The first support was hit at the open of May 21st at SPX 1056. The market rallied from that low but failed at SPX 1090. Then the second support level was hit at the open of May 25th at SPX 1041. The market has since rallied to a high of SPX 1103 on thursday. 

Coinciding with this correction, and probably the reason for its severity, is the four year cycle low. This is the only cycle we have found to be consistent throughout the decades as it relates, somewhat, to the four year presidential election cycle. Every four years, since 1934, it has either created a bear market low or a steep correction and low for the year during a bull market. There have not been any exceptions. The last cycle low came in July 2006 during an extended fifth wave bull market, and a new bear market was declared by many. The bull market resumed after the cycle bottomed. Prior to that was the bear market low of October 2002. Continuing in descending order was the 1998 crisis, the 1994 low and the 1990 low. These all occurred during a bull market, and were all declared new bear markets. When this cycle is bottoming after a five wave sequence it typically corrects about 38.2% to 50.0% of the previous five waves, and it takes about two to three months to unfold. During this bottoming process the weekly RSI gets oversold and the MACD drops to about neutral. With the correction just entering its second month and the weekly MACD declining but still at 14.3%. It appears this correction still has some time to run its course. Also of note, some of these cycle lows form complex zigzags and some form flats. So it is possible the market will make a substantial low and then retest that low before resuming the bull market. Since this is a Primary wave II correction all possibilities are available. Our best guesstimate, based on historical data, suggests a 50% retracement to the OEW 944 pivot in July.

SHORT TERM

Support for the SPX remains at 1058 and then 1041, with resistance at 1090 and then 1107. Short term momentum was overbought on friday and declined past neutral into the close. We’re currently counting this correction as an ongoing complex zigzag. The SPX declined from the 1220 uptrend high to the flash 1066 low. We labeled that Major wave A. A sharp reflex rally carried the SPX to 1074 within one week. We labeled that Major wave B. Since then the SPX has declined to 1041 this past tuesday. We feel this is only part of Major wave C. At this low, however, there were some positive divergences in the hourly/daily RSI and the SPX has rallied to the 1107 pivot. We continue to see OEW 1090 as the swing pivot for this correction. Above it is positive, below it negative. Pivots are posted on the hourly and daily SPX charts. Best to your trading!

FOREIGN MARKETS

Asian markets were mostly higher on the week gaining 1.9%. Australia’s ASX (+3.5%) led and Japan’s NIKK (-0.2%) lagged.

European market were all higher on the week: +1.6%. England’s FTSE (+2.5%) led and Spain IBEX (+0.2%) lagged.

The Commodity equity group were all higher and gained 2.7% on the week. Russia’s RTSI (+5.0%) led and Canada’s TSX (+1.3%) lagged. 

COMMODITIES

Bonds lost 0.5% on the week with the rally in equities. Rates remain in a trendless range.

Crude soared 5.6% on the week after three weeks of declines. May have a bit more to go on the downside ($65) before bottoming.

Gold rallied 3.2% on the week. Should be making new all time highs soon.

The USD gained 1.6% on the week. The USD looks to be topping medium term, and the Euro bottoming.

NEXT WEEK

Monday holiday. Tuesday starts the week with Construction spending and ISM manufacturing at 10:00. On wednesday, monthly Auto sales will be announced. Thursday, weekly Jobless claims, the ADP index, Productivity, ISM services and Factory orders. Then on friday the popular Non-farm payrolls and the Unemployment rate. As for the FED. On sunday FED chairman Bernanke gives a speech in S.Korea. Then on thursday he again gives a speech but this time at the Chicago FED. Best to you and yours this Memorial Day weekend.

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