weekend update -- MrSwing

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weekend update
Sep 20, 2008

Tony

ELLIOTT WAVE LIVES ON
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REVIEW

What a week! After the Treasury/FED decided to test the market by letting LEH file chapter 11 on monday, the market responded. On monday the DOW dropped 500 points. On tuesday the insurance giant AIG failed and the Treasury effectively nationalized them. Then on wednesday the DOW dropped 450 points more, Gold was rocketing, short term rates were in a free fall, credit was freezing up, and MS/GS were collapsing. With the banks under significant pressure, BSC/LEH/MER already gone, AIG and other insurance companies under pressure, and now the money markets wavering, something had to be done and fast. Hundreds of billions of dollars, by central banks worldwide, were injected overnight into the markets to address liquidity. On thursday as the markets continued to fall extraordinary steps were taken. The SEC invoked the ban on naked short selling again. The UK took it a step further, banning all short selling until next year. As the market gyrated, word came out that a massive government plan was being put together to address the financial markets. The markets recovered and the DOW closed up 400 points.

On friday before the open, the SEC invoked a two week ban on all short selling. The Treasury announced it was buying FNM/FRE paper, etc. Markets went soaring worldwide. Then on options expiration day the US markets opened with a huge gap up of over 4%. The major bailout plan is being worked on this weekend by the President, Congress, the FED and Treasury.

LONG TERM: bullish

From the October 2007 high at SPX 1576, we have been counting this bear market as an ABC Primary wave A. We projected in January, see chart in photo section, that each wave of the ABC decline would subdivide into three waves of their own. Bear markets are merely corrections to bull markets, and are like corrections during bull markets, they are not impulsive five wave structures. Our ultimate target from the SPX 1576 high was the previous fourth wave of a lesser degree around SPX 1070. As the bear market started to unfold it completed Major wave A in January at 1270, this had subdivided into three Intermediate waves (Nov-Dec-Jan). Then the market rallied in an irregular fashion, with three more Intermediate waves into the SPX 1440 high (Feb-Mar-May). Then we projected that the next major decline, Major wave C, would unfold again in three Intermediate waves. We also projected a minimum target of about SPX 1140, with a maximum downside of about SPX 1060. Since Major wave A was 306 points (1576-1270), then the minimum downside for Major wave C should be (1440-306) SPX 1134. On thursday the SPX hit 1134 exactly at 1:00. The market rallied sharply from that level, but still within the context of a continuing downtrend. That all changed overnight as mentioned above.

In addition to following the waves, we also follow a myriad of technical indicators. Some are posted on the charts, like RSI/MACD and the OEW pivot points. There are others that we use that are more long term oriented. Typically nearing the completion of a long term trend, these indicators will start to display divergences when the wave structure of the general market is about to conclude. Several in our OEW group had been noticing these divergences as this last downtrend got underway. When the market started making new lows, nearly everyone of them were displaying positive divergences. Therefore, we concluded that this downtrend would indeed end this leg of the bear market, Primary wave A. Based upon the market action between 1:00 thursday and 12:30 friday, when the SPX rallied from 1134 to 1265. We're assuming that the recent downtrend is over, although it has not been confirmed by our quantitative OEW yet. The assumption is being made based upon the extent of the rally and short term wave structure. Since this multi-hour rally (131 points) has already exceeded the entire advance of the uptrends in Nov (118), Feb (126) and Aug (113), it appears to be a safe assumption. Therefore Primary wave A should have ended on thursday at SPX 1134.

Continuing with our long term forecast of an ABC five year bear market. We had anticipated that Primary wave A would last about one year. This would be followed by a major retracement of that decline, Primary wave B, and it would last about 6 months or so. Only to be followed by a prolonged three year decline into the eventual Cycle wave II bottom. Since Primary wave A appears complete at SPX 1134, we can now project a multi wave rally that should retrace about 61.8% of the entire decline thus far. Applying Fibonacci: the 1576 high minus the 1134 low equals 442 points; and 0.618 times 442 equals 273 points; then 273 plus 1134 equals SPX 1407. Since we have an OEW pivot at 1410 that should be the target for Primary wave B. As noted, Primary wave B should take about six months or more to unfold. It should also advance in a three wave structure, but these waves should be of a Major wave degree. All we await now is OEW confirmation of the new uptrend.

MEDIUM TERM: downtrend appears to have bottomed at SPX 1134

While anticipating that Intermediate wave C would equal Intermediate wave A (240 points) from the Intermediate wave B high at 1313, or SPX 1073. Again the FED/Treasury/SEC stepped in and truncated the decline. This is the same type of market intervention that occurred in Jan, Mar and July. Only this time they took out the entire country's checkbook. Kind of reminds me of the last eight years of the G W administration. Nevertheless, Primary wave A displayed some interesting symmetry. Int. wave A of A (Oct-Nov), Major wave B (Mar-May) and Int. wave C of C (Aug-Sept) were all between 170-180 points. Then Int. wave C of A, and Int. A of C were between 240-250 points. Therefore two point ranges contained all the waves during Primary wave A. In other words Major wave C ended up being the inverse of Major wave A. You may need to check the charts to clarify this. With Major wave C equalling Major wave A at thursday lows, several positive technical divergences appeared in the SPX charts. Not only did the hourly, daily and weekly charts form positive RSI divergences, but the long term monthly chart did as well. Now, if we apply the same price range symmetry on the way up, as occurred on the way down, we can make some estimates for the waves of Primary B. Since Primary wave A bottomed at 1134, adding the 170-180 range gets us near to the 1316 OEW pivot. Since the market has already rallied 131 points in one day, that target may be a bit shortsighted. Next we would be adding the 240-250 range to 1134, and that gets us near the 1383 OEW pivot. This would suggest a double top type of formation for Primary wave B, if it is to conclude at SPX 1410. Therefore for now, SPX 1316 should be our target for this uptrend, with a possibility of SPX 1383.

SHORT TERM

Nearing the end of this truncated downtrend the wave count became a bit sloppy with all the volatility. Support for the SPX is now at 1240 and then 1219, with resistance at 1261 and then 1287. Short term momentum is overbought, and the near term indicators have spiked to their highest level since the kickoff of the Mar-May Major wave B. On friday the SPX gapped right over the 1219 and 1240 pivots at the open, then ran into resisitance at the 1261 pivot. On both pullbacks it found support at the 1240 pivot. Typically during a kickoff like this short term momentum should get extremely overbought before any substantial pullback occurs.

FOREIGN MARKETS

Many of the Asian markets tried to play catch up on friday and soared. Of note is Hong Kong which swung 3,000 points (18%) in two days. No confirmed uptrends yet.

The European markets surged on friday too and continue to reflect the ongoings in the US.

The Commodity markets rallied as well, but are still in downtrends.

COMMODITIES

Bonds soared this week only to give back all three points of gain on friday. Downtrend now likely.

Crude rallied after touching $90 on tuesday, after getting extremely oversold.

Gold rallied nearly $200 in five trading days, after setting up positive divergences at the lows.

Currencies were quite volatile, and the USD with negative divergences in place, should now be correcting.

NEXT WEEK

Word of the newest and greatest government bailout plan should be announced this weekend. This week is light on economic reports. On wednesday Existing home sales are to be reported; followed by New home sales, Durable goods and the Weekly unemployment report on thursday. Friday we get a Consumer sentiment reading and a revision to Q2 GDP. As for the FED it's Bernanke week. Starting on tuesday and ending on thursday, if he's lucky, FED chairman Bernanke will sit before Congress and give testimony. On tuesday the topic is the US financial markets, wednesday the Economic outlook, and thursday the recent Treasury and federal housing and finance agency actions involving the government-sponsored enterprises. It would probably be best if he just took up residence there. This should be quite an interesting series of events. Best to your week!
CHARTS: http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1606987