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Despite lots of negative economic news: PPI @ 9.2%, CPI @ 5.0%, retail sales +0.1% (excluding inflation), manufacturing down in many FED districts, housing starts -5.3%, and the home building index at its lowest level ever, the market rallied this week. The reason for the rally was not the failure of IndyMac, or the FED opening the discount window to FNM/FRE, but the SEC declaring that 'naked' short selling on Primary dealers and the GSEs is no longer allowed. Short selling occurs when stock is borrowed and sold in the market, then returned to the lender when the position is covered. Naked short selling, is selling stock that never existed, usually in some combination with a derivative. If stock can be sold that never existed, then we should also be able to buy stock that never existed to counter balance the effect. Clearly one can see how ludicrous this sounds. Since there is no counter balance to the trade, naked short selling should have never been made illegal in this first place.
insert.a.chart.SPX
LONG TERM: bear market
The bear market, since October 2007, made new lows this week. But we are beginning to see some light at the end of the nine month, Primary wave A tunnel. The lows for Primary wave A are not yet in place, because another downtrend will follow this rally. But the next downtrend may be the last. The preferred OEW count, as noted on the SPX charts, is an abc Major wave A into the January low, followed by an abc Major B rally into May 2008. The recent decline from SPX 1440 to 1200 this week could have completed Intermediate wave A of the current abc Major Wave C decline. Upon completion of Major wave C, Primary wave A will conclude, and a multi-month broad based rally should follow. Now that most of this leg of the bear market has unfolded we can now our refine projections. Since Major wave A was about 300 points (1576-1270), and Major wave B ended at 1440, then if Major wave C equals A the low should arrive near SPX 1140 (1440-306). And there is an OEW pivot at 1136. Next, if the low of this recent downtrend was indeed 1200, then Intermediate wave A was 240 points (1440-1200). A 50% retracement rally to 1320 would complete Intermediate wave B, then the downtrend Intermediate wave C would follow. If Intermediate wave C equals Intermediate wave A, then a low should arrive at SPX 1080 (1320-240). This is in line with our projection of Primary wave A ending just under SPX 1100, and is close to the end of Primary wave IV of the bull market. There is also an OEW pivot at 1090. Therefore fibonacci relationships project the end of Primary wave A between SPX 1080-1140 in the coming months. This will be followed by a multi-month, maybe year long countertrend rally, retracing more than half of the entire decline from SPX 1576. The light at the end of the tunnel.
MEDIUM TERM: downtrend may have bottomed at SPX 1200
From the May 1440 top, where the market spent exactly two hours, this downtrend has continued for two months. As we have noted during the downtrend, every rally had been limited to less than 40 points, for the entire 240 point decline. At tuesdays low of SPX 1200 the market rallied into wednesday reaching 1246, changing the characteristics of the selling. Thursday the rally continued higher to 1262, and then failed to break through that resistance pivot right into friday. This represents a 62 point rally from the 1200 low, which likely indicates that the downtrend is over, and an uptrend is underway. The typical uptrend rallies during a Major wave have been sharp of short lived. We witnessed one in December and another into February. The one in December followed an Intermediate wave A downtrend, and retraced about 50% of the entire decline. This uptrend is likely to do the same. So we would expect a short lived, sharp rally back to around 1320 into early August. There are two OEW pivots around this level: one at 1316 and the other at 1327. One of these two pivots should provide resistance to this uptrend. Then as noted above, another downtrend should follow into the final lows of this leg of the bear market.
SHORT TERM: sharp rally continues
Support for the SPX remains at 1240 and then 1219, with resistance at 1261 and then 1287. Short term momentum ended just above neutral. The near term indicators are rising sharply, and have reached their highest level since the downtrend began. Adding to the uptrend evidence is the break through the 89-hma and the consolidation above that moving average on friday. There are also numerous positive divergences in place. The likely cause of the market halting its decline at SPX 1200, was forced short covering in the financials. The XLF broke through its 2002 low this week before rallying, and the banking BKX reached levels not seen since 1996. The ruling by the SEC, limiting naked short sales, forced a short covering rally which carried the entire market higher. From the SPX 1200 low, this potential uptrend should unfold in three waves (abc): possibly an 'a' to 1287, a 'b' to 1240, and then a 'c' into the 1320's. These are all OEW pivots. Best to your trading!
FOREIGN MARKETS
The Asian markets are mostly displaying positive divergences at the recent lows and should start to rally. What will be interesting to see is how fast and how far Hong Kong's HSI and China's SSEC can advance. Critical point for those two markets. Japan's NIKK continues to follow the Yen.
The European markets are also displaying positive divergences and expect them to follow the US.
The commodity markets have been under pressure lately, while downtrending, but should move higher as well.
COMMODITIES
Bonds continue their bear market. Rates started to downtrend, but now that trend is in jeopardy already.
Crude had its worse week on record, dropping 11.1%. Heard there was central bank intervention early in the week. It had reached the minimum $147 target and may now be correcting within its bull market.
Gold made new uptrend highs this week to $980, and has held up well despite selling across the commodity sector. Uptrend still in place in its bull market.
The Euro is uptrending, but heard there was also central bank intervention when it was making new highs.
NEXT WEEK
Leading indicators on monday at 10:00, tuesday OFHEO home prices at 10:00, then Beige book on wednesday at 2:00. Thursday reports includes the weekly unemployment claims and existing home sales. Then on friday new home sales and consumer sentiment. No FED speeches schduled. Best to your week!
Please note
that charts and commentary provided by the moderator are for educational
purposes only. Any trades placed upon reliance on the moderator’s
charts or information is taken at your own risk for your own account.
Past performance is no guarantee of future results. While there is great
potential for reward trading stocks, futures and options, there is also
substantial risk of loss and you must decide your own suitability to trade.
Future trading results can never be guaranteed. This is not an offer to
buy or sell stock, futures, options or commodity interests.
Most trading
systems are based on historical formulas which have worked in the past.
However, what has happened before may or may not happen again. You can
lose all your money trading stocks, futures, and options and you must
decide your own suitability as to whether or not to trade. Only trade
with true risk capital you can afford to lose. Only trade markets you
can properly afford to trade. Properly funded trading accounts typically
perform better than those that are not. Never risk more than 2-3% of your
account on any one trade. Always define your risk before entering a trade
and place a stop to limit your risk.
There are
no guarantees or certainties in trading. Trading involves hard work, risk,
discipline and the ability to follow rules and trade through any tough
periods during a system’s draw downs. If you are looking for a guarantee,
trading is probably not for you. Most people lose money trading. One of
the reasons is that they lack discipline and are unable to be consistent.
A system can help you become consistent. Ironically, worrying about the
monetary aspect of trading can contribute to and cause a trader to make
trading errors. Therefore, it is important to only trade with true risk
capital.
