weekend update -- MrSwing

You Are Here: Home > Articles > Commentary > weekend update

weekend update
Dec 06, 2008

Tony

ELLIOTT WAVE LIVES ON
More articles

Font Size:

REVIEW

Another volatile week in the equity markets after several economic reports hit multi-decade and/or record lows. A quote from the CEO of DOW Chemical this week; "As you know we are on the leading edge of economic recoveries. From what we are seeing, the economy has dropped into a black hole and we see little chance of recovery in 2009. Hopefully, 2010 will be better." This tidbit of news is certainly something to keep in mind in the months and year ahead. For the week the SPX/DOW recovered from monday's selloff to end the week -2.3%, and the NDX/NAZ were -1.4%. Bonds continued to benefit from the flood of new money +2.2%, Crude dropped 25.0%, Gold lost 8.2% and the Euro was slightly higher. Despite all the negative economic news, the equity market appears to be building a base for the first time in months.

LONG TERM: bear market rally

This week the equity bear market entered its fourteenth month. The National Bureau of Economic Statistics (NBER) reported that the recession started in December 2007. Exactly twelve months after the fact, and hardly useful information for investors. Conventional wisdom also suggests that the stock market will bottom about six months before the recession ends. Again useless information for investors, unless of course they possess a crystal ball. We concluded in November, using third dimensional OEW analysis, that a recession began in November 2007 and should be continue until the end of 2009. We also concluded that the stock market should bottom a few months "after" the recession ends, in early 2010. There should be a series of market events leading up to the conclusion of the recession. These market events will act as the leading indicators. We will keep you posted.

Technically, the bear market has been unfolding in a series of abc's. As has every quantifiable bear market in the history of the US, including the depression. Bear markets are merely corrections to larger scale bull markets. In our effort to quantify this bear market we have maintained two counts. The first as posted on the SPX charts: an abc into the Jan 2008 low completing Major wave A, an abc rally into the May high completing Major wave B, and an abc down into the recent low potentially completing Major wave C and Primary wave A. The second count is posted on the DOW charts. This suggests five waves down to Mar 2008 to complete Major wave A, a rally into the May high to complete Major wave B, and now three waves down into the recent low as part of Major wave C and Primary wave A. The preferred count is posted on the SPX charts. The market will determine, over the next few months the correct count. When OEW confirms the next uptrend (wave), the extent and duration of the uptrend will likely determine the market's count. Whenever Primary wave A does end, Primary wave B should provide a powerful rally, and then Primary wave C should unfold in another series of abc's into the final bear market low. Typically the C wave of any bear market is more devastating than the A wave. Please keep this in mind during the Primary wave B phase of the bear market. B wave rallies during bear markets are often mistaken for new bull markets. This mistake often lures investors into buying into the rally rather than selling. Remember we're only about halfway through the recession.

MEDIUM TERM: downtrend low at SPX 741

During the past two weeks the market has managed to rally for 5 days in a row, for the first time since May 2007. Then stabilized after a one day 9% decline on monday, and rallied into the end of the week despite very negative economic reports. Also, a negative divergence on the hourly charts has not led to new lows in the downtrend. The character of the bear market may be in the process of changing for a while. There are positive divergences on nearly every time frame in many of the market indices we follow. In a typical market this alone would lead to a substantial rally. Thus far it appears we are indeed getting that rally. After posting a bear market low at SPX 741 on Nov 21st, the SPX rallied to 896 on Nov 28th. When that low was made, the SPX broke through its 2002 low of 768, but the DOW/NDX/NAZ failed to follow through and take out their 2002 lows. This is also known as a positive divergence. After that 155 point rally in the SPX, the market dropped hard on monday to 816, losing 9% of its value, while retracing 50% of that advance. On tuesday it held the lows, then rallied into thursday, only to retest those lows again on friday morning. After the retest the market then rallied past thursday's 876 high, hitting 879, and closing at 876. This certainly looks like a successful retest, and all indicators suggest the market will continue higher into next week. Once a new uptrend is confirmed we expect the SPX to test the 1107 long term pivot, and possibly the 1179 pivot before Primary wave B ends. Should this scenario unfold, this will provide the last opportunity to exit this market before Primary wave C unfolds.

SHORT TERM

Support for the SPX is at 848 and then 789, with resistance at 912 and then 935. Short term momentum set up a nice positive hourly divergence at friday's lows, and ended slightly overbought at the close. Thus far we have labeled the rally from the SPX 741 low into the 896 high as wave A. The pullback into mon/tues at 816/818, the thurs high at 876, and pullback to 818 again on friday, we have labeled wave B. From the friday low we should now be rallying in wave C. This entire abc rally should complete a larger wave A of the next uptrend. The degree of the waves will be determined as the rally (expected uptrend) unfolds. Since wave A was 155 points, and wave B bottomed at 818. Wave C will equal wave A at SPX 973, and will be 1.618 wave A at SPX 1068. We have on OEW pivot at 961 and another OEW pivot at 1061. So both levels are in play at this point in time. Let's see how the rally unfolds.

FOREIGN MARKETS

The Asian markets in unconfirmed uptrends lost 6.9%, those in uptrends gained 2.1% led by China's SSEC (+7.9%).

The European markets did not benefit from friday's rally in the US and closed down 5.9% on the week.

The Commodity markets, Canada's unconfirmed uptrend lost 12.4%, while uptrending Brazil lost 3.4%.

COMMODITIES

Bonds continued to defy gravity gaining 2.2% on the week to multi-decade highs. More on this below.

Crude was hammered this week after OPEC failed to take any action during last weekend's emergency meeting, down 25.0%.

Gold continues to lag investor expectations as a safe haven, down 8.2% in its downtrend.

Currencies were relatively quiet with the Euro gaining 0.2%, and the USD gaining 0.5%. The USD appears to have concluded its uptrend.

SPECIAL COMMENT on BONDS

Throughout this decade investors have shifted from one asset class to another leaving bubbles in their wake. Real estate, credit, credit derivatives and then commodities. Each bubble has eventually led to an implosion in that asset class, which has fueled the bear market. Recently the Treasury market has begun to inflate. Apparently, a lot of this new liquidity is being pumped into bills, notes and bonds. After the 10YR bond yields went to multi-decade lows we reviewed the long term bond market from the rate peak in 1980. What we found was a series of, again ABC's, from the rate peak into the recent lows. Based upon this OEW analysis, and several other technical tools, we have concluded that long term rates will continue to move lower into next year. And may bottom at around 2%. Currently, rates have been declining since their 5.32% peak in mid-2007. A low occurred in March 2008 at 3.29%, and this ended the A wave down from the 2007 peak. A B wave rally followed into June and 4.32%. Since then the yields have declined in a smaller abc into the recent low at 2.51%. When this downtrend ends, rates should rally for a month or so, and then, decline in another small abc into their final low next year. Upside resistance should appear around 3.25%. One might want to wait for these rates before buying into the bond market. As you know Bonds rally in price while rates decline in value. All maturies of 2 years or less are now yielding less than 1%. The 5 year hit 1.51% this week. While demand for the USD and Treasuries have soared, the US government has nearly tripled its long term debt from $4 trln to $11 trln in 2008.

NEXT WEEK

Tuesday we start off with Pending home sales. Wednesday wholesale Inventories and the Budget deficit. Thursday, the weekly Unemployment claims, the Trade deficit and the Import price index. On friday, the PPI, Retail sales, a Consumer sentiment reading and Inventories. As for the FED, two speeches on monday. One from FED governor Kroszner in Switzerland, and the other from FED vice chairman Kohn in DC at 11:00. Then on thursday the Flow of funds Accounts of the US. Also expecting some sort of temporary bailout package for the automakers early in the week. Best to your week!

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