weekend update -- MrSwing

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weekend update
Sep 13, 2008

Tony

ELLIOTT WAVE LIVES ON
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REVIEW:

The market made a new low for downtrend but rallied to close the week: SPX/DOW +1.3%, and the NDX/NAZ mixed. Bonds yields rose 19 bps after the FNM/FRE bailout. Crude was -4.7% and Gold -4.8% as commodities remained under pressure. Then, despite the USD making new highs for its uptrend, the Euro/USD ended flat. On the economic front: home sales continued to decline, manufacturing inventories are building, weekly unemployment claims remain over 400K, the twin deficits continue to expand, retail sales are still declining, the PPI showed some improvement. And, the FED/Treasury are having another weekend meeting, this time regarding LEHMAN. WAMU next week?

LONG TERM: bear market

This past thursday the bear market completed its eleventh month. By some measures it has been one of the most volatile bear markets in recent memory, despite the fact that the SPX has only dropped 24% from top to bottom (1576-1200). Clearly this volatility can be blamed on periodic government intervention. However, one can not blame Bernanke nor Paulson. They inherited one the biggest financial industry meltdowns in many a decade. The FED has taken an extraordinary step by placing its $800 bln balance sheet up as collateral for the Primary Dealers. And the Treasury, as anticipated, nationalized the $5,000 bln debt of FNM/FRE this week. That's nearly $6 trillion in potential US debt obligations just in the past six months. Natually, no one expects the entire housing market to go into default. Even during the depression of the 1930's, only about 20% of the mortgages went into foreclosure. While, the risk to the Treasury would therefore be about $1 trillion, the risk to the FED is open ended. Of the $1 trillion in writedowns expected in the banking industry, only one third of that has been written off thus far. The only way to stop these ongoing writedowns, is to increase employment, lower mortgage rates, and for the banks to clean their balance sheets. Easier said then done. Meanwhile the government addresses the failure of another Primary Dealer this weekend. Technically the bear market continues to unfold as expected. Please review last weekend's update for details.

MEDIUM TERM: downtrending

The confirmed downtrend from SPX 1313 and in many of the important indices continues. After the SPX spent most of the month of August holding the 1261 support pivot. The breakdown occurred in the first week of September, after many returned from holiday. We started our downtrend count at the SPX 1303 high, rather than the actual price high at 1313. As this appeared to be a C wave failure on a lesser degree. From the SPX 1303 high on tuesday Sept. 2nd, the market declined to 1217 by that friday. This, as noted last week, appeared to be the end of Minor wave 1, and we expected a rally into monday/tuesday. On monday of this week, the SPX hit 1274 and completed Minor wave 2. The 57 point Wave 2 retracement (1274-1217) of the 86 point wave 1 decline (1303-1217) is quite normal for this bear market. Review the November and January downtrends. From the Wave 2 high the market sold off to make a new low for the downtrend at SPX 1212 on thursday. This was followed by a quick rally up to 1255 on friday. We consider this second decline and rally as part of Minor wave 3. This recent action looks somewhat similar to the beginning of November and June. There have been two important indices that have already made new bear market lows: the NYA and the SOX index. The NYA gauges all the US stocks on the NY stock exchange, and the SOX (semiconductor) is an important factor in the Tech industry. They have often led during declines.

SHORT TERM

Support for the SPX remains at 1240 and then 1219, with resistance at 1261 and then 1287. Short term momentum is displaying a slight negative RSI divergence at friday's highs. However, with the government meeting this weekend, monday could be a volatile day. The near term indicators are suggesting that the market may rally a bit more before turning lower. With the FOMC on tuesday, and this being an options expiration week, it could be quite a wild week. Be careful!

FOREIGN MARKETS

All the Asian markets are now in downtrends. India's BSE held up longer than most, and some didn't even participate in the recent worldwide uptrend.

The European markets we follow are both in downtrends as well, and moving along with the US market.

The Commoditiy markets failed to participate during the uptrend and have made lower lows this week. Bear markets all around the world.

COMMODITIES

Bonds rallied initially on the FNM/FRE bailout news, but closed the week near the lows. Negative divergences in place.

Crude traded right to $100 on friday and is extremely oversold. Due for a bounce.

Gold broke through support this week, is extemely oversold, and is displaying some positive divergences. It bounced on friday.

The Euro has been in a steep downtrend for two months, is extremely oversold, and the USD is displaying negative divergences.

NEXT WEEK

Some resolution to the Lehman situation should be announced on sunday. Then the Empire state index and Industrial production starts of the week on monday. Tuesday we have the CPI and Home builders index before the FED announces its next course of action. Wednesday is Housing starts and the Current accounts deficit. Then the weekly Unemployment claims, Leading indicators, and the Philly FED on thursday. Finally Options expiration on friday. Should be quite a volatile week.

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