REVIEW
After posting an uptrend high at SPX 1423 a week ago friday, the market closed lower on the week: SPX/DOW -2.1%, and NDX/NAZ -1.2%. This is the first weekly decline since the second week of April when GE disappointed. In the commodity bull market: Crude soared 8.3%, Gold gained 3.2%, and the CRB added 4.7%. Bonds were +1.0%, and short term rates were relatively flat. The Euro gained 0.3%, the USD -0.7%, and the carry trade Yen rallied 2.4%.
insert.a.chart.SPX
LONG TERM: bear market
Through the centuries and especially in the decades of the 20th century, humanity has progressed socially, economically and politically. The secular trend has been economic growth. As a result investors are generally bullish, as is this investor, and rightfully so. However, economic expansions are cyclical. There is at first a period of expansion, followed by a period of flat or negative growth. The stock market generally follows this cyclical pattern, by raising expectations during expansions, and lowering them during contractions. Up until the early 1980's the correlation between recessions and bear markets were synchronous. After the early 1980's that relationship has become sporadic. In other words, recessions have occurred without bear markets, and bear markets without recessions. Therefore, for an investor, all the media talk about whether or not a recession will occur is now meaningless. The definition of a recession is two consecutive quarters of negative GDP. In calculating the GDP, the government uses a CPI price deflator, subtracting inflation from the actual numbers to get real growth. However, since the CPI deflator is 42% subjective. Neither the CPI, nor the GDP are reliable figures. This could be the reason that recessions and bear markets have lost their direct correlation since the early 1980's. Since the relationship is no longer exact. The stock market has responded to growth expectations, rather than the GDP numbers.
OEW defines bull/bear markets quantitatively. Just like it quantifies the significant waves within those trends. It is precise, and not subjective. Since 1982 OEW has confirmed four bear markets: 1984, 1987, 2000-2002, and 2007---. Neither 1990, nor 1998 were quantified as bear markets. They were only corrections during the 13 year (1987-2000) bull market. Yet, according to the government there have only been two recessions during that period: 1990-1991, and 2001. Prior to 1982, the relationship between OEW bear markets and GDP recessions were nearly perfect. Since OEW is a quantified measurement, and the GDP is subjective, I'll side with the quantitative measurement every time. The only quantitative question that remains, is whether or not the March low was the end of the bear market, or just the first leg down. Since the OEW long term trend is still negative, I prefer to wait for a quantified positive confirmation. However, one can speculate either way, speculate. Until the market generates a quantitative long term uptrend reversal. The projected bear market scenario posted in the photo section still applies.
MEDIUM TERM: uptrend may have topped at 1423.
From the March 2008 low, the market has experienced its best uptrend since the bear market began. It has taken quite a bit longer than the two previous uptrends: December and February, which were two to four weeks. But it has outperformed them in both points gained (166 to 118, 126), and percentage gained (13% to 8%, 10%). Nevertheless, as we have commented throughout the uptrend, it appears corrective and just a rally within an overall bear market. The recent high at SPX 1423 ended helfway between our two OEW pivots 1410 and 1438. This is similar to the February uptrend high at 1396, which also ended halfway between two OEW pivots 1383 and 1410. At the recent high, the daily RSI/MACD and weekly RSI were the highest they have been since the October 2007 bull market top, and have since turned down. Also, the near term RSI is displaying a multi-week negative RSI divergence, just like it did at the October 2007 top. As we have noticed over the past few months. In bear markets, traders can stay irrational much longer than expected. This is why bear markets can unfold in complex EW patterns, making them difficult to predict. Nevertheless, while many of the sectors are in between recent highs and lows, the Housing index which started its bear market in 2005, is already downtrending again. Also of note, while the Techs continue to display relative strength, the DOW is beginning to lead the market lower. The stage appears to be set for the start of the next downtrend.
SHORT TERM: key support SPX 1383
Support for the SPX is at 1383 and then 1364, with resistance at 1410 and then 1438. Short term momentum is around neutral, while the near term indicators continue to erode. This week as the market turned lower, the SPX broke through the rising 55 hma, that had created support for nearly a month. See SPX hourly chart. On friday the SPX tested the 1383 pivot both at the open and in the afternoon, and held support. When it does break through this support pivot, the OEW pivot at 1344 would appear to be the short term objective. A decline from 1423 to 1344 would be about 80 points, which has been typical of the first wave of this bear markets downtrends. With negative divergences short term, and declining technicals near and medium term. The OEW 1344 pivot appears to be the next probable target.
FOREIGN MARKETS:
The Asian markets have all been uptrending, but several had sharp one day selloffs this week. Most will probably follow the western markets, but China should rally.
The European markets have been uptrending, but look to be topping as well.
Brazil continues to follow the commodity markets, while Canada appears caught in between a commodity bull market and general bear market.
COMMODITIES:
Bonds are displaying a slight positive divergence at the recent lows and could rally from here, within a bear market.
Crude exploded this week to new all time highs as its three month uptrend continues, in its bull market.
Gold rallied off the $846 low and is trying to establish a new uptrend, within its bull market.
In the currencies: the Yen woke up this week after holding support at 95 and is trying to uptrend. The Euro/USD remain in their respective trends.
NEXT WEEK
Retail sales and inventories will be reported tuesday, CPI on wednesday, Industrial production and Home builders index on thursday, and Housing starts on friday. The FED appears to go on tour next week. On tuesday at 8:20 Bernanke's in GA, wednesday at 9:15 Kroszner is in MA, thursday at 9:30 Bernanke's in IL and Mishkin at 7PM in PA. Could be a wild week after little volatility recently. Best to your trading!
