U.S. Stock Market at Inflection Point

By: Tony_Caldaro

An interesting week. The market opened the week with a large gap down, the fifth gap opening in six trading days, and traded down to SPX 1359 in the first half hour. That was the low for the week. The market then recovered, somewhat, on monday and tuesday. Then AAPL’s earnings were released after tuesday’s close. On wednesday the market rallied, despite a ‘hold the course’ FOMC statement. Thursday the rally continued. Then on friday Q1 GDP was reported lower than expected, but the market still managed to end higher. For the week the SPX/DOW were +1.65%, and the NDX/NAZ were +2.35%. Asian markets were -0.6%, European markets were +1.0%, and the DJ World index rose 1.1%. Economic reports were mixed, with negatives outpacing positives 7 to 6. On the uptick: new/pending homes sales, FHFA, new home prices, consumer sentiment and the monetary base. On the downtick: Q1 GDP, WLEI, Case-Shiller, durable goods orders, the M1-multiplier, and weekly jobless claims rose. Next week we’ll get reports on monthly Payrolls, ISM, Chicago PMI and Auto sales. Best to your week!

LONG TERM: bull market

We continue to see a bull market unfolding in the US stock indices from the Mar09 low at SPX 667. Primary I, of a five primary wave bull market, completed in May11 at SPX 1371. Primary II completed in Oct11 at SPX 1075. Primary III is currently underway. Within Primary III we are tracking five Major waves. Major wave 1 concluded in Oct11 at SPX 1293. Major wave 2 ended in Nov11 at SPX 1159. And, Major wave 3 probably concluded in Apr12 at SPX 1422. We state probably, because the SPX has not confirmed a Major wave 4 downtrend yet. When Major wave 4 does conclude we will still have a rising Major wave 5 ahead to end Primary wave III. Then a declining Primary wave IV will lead to a rising Primary wave V to end the bull market some time in 2013 within the SPX 1545-1586 range. This should be followed by a nasty 50% market decline into 2014/2016.

The weekly chart continues to display positive technicals, as well as, the labeling for the bull/bear/bull markets over the past ten years. The RSI continues to hit extremely overbought levels, and the MACD continues to remain generally above neutral. These indicators do just the opposite during bear markets. We also note the economy is expanding, (over 50%), consumer sentiment is still on the bearish side, (under 50%), while investors are generally neutral (just above 50%).

MEDIUM TERM: DOW confirmed a downtrend, the SPX has not

During the month of April the DOW, and probably the NAZ, confirmed downtrends but the SPX and NDX did not. This is a somewhat rare, and unusual event, but has occurred before. Typically, all four major indices move trend for trend, in unison, with some lag time. Since 2006 there has been hardly any deviation. During the 2003-2005 period, however, the DOW deviated from the other major indices on five occassions.

The first two times occurred early in uptrends. This does not appear applicable to our current market since all four major indices had been uptrending for five months before the DOW confirmed a downtrend. During the last three times the DOW eventually ended with the same wave pattern: an irregular ABC correction. The initial downtrend in the DOW confirmed an A wave, while the SPX only pulled back. When the SPX continued to rally the DOW confirmed a B wave uptrend. All three DOW B waves were limited to 1.382 times A, or less, i.e. DOW 13,520 or lower. Then all four major indices entered confirmed downtrends to complete the correction. When the correction completed the C wave ended at a slightly lower level than the A wave low. This type of correction, in this bull market, would certainly alternate with the Major wave 2 zigzag that occurred between Oct11-Nov11.

Since OEW relies on quantitative wave analysis and the objectivity of probability. We are labeling the April decline as Intermediate wave A of Major wave 4 in the DOW, and the current rally as Intermediate wave B. Probabilities, 60%, suggest Major wave 4 has not completed. This count is carried on the DOW daily chart. In all fairness, however, even with a low 20% probability. We will track the April low, as the end of Major wave 4, with an alternate count on the NAZ daily chart.

Remaining objective again. The SPX and NDX have not confirmed downtrends. Probabilities suggest the recent decline was only wave 4 of the uptrend, i.e. Intermediate wave iv. This suggests Int. wave five is currently underway. It is likely to make a new high, be short in length and duration, and complete Major wave 3. We display this count on the SPX and NDX daily charts.

When indices divergence like this it is generally a sign of current weakness specific to that particular index. Since the DOW is the international index of the four majors, it is reflecting the general weakness in the international markets. Over 80% are in confirmed downtrends. The SPX/NDX are more US specific, and have not confirmed that weakness yet. There is also the factor of futures related volatility. The DOW and NAZ are less sensitive to futures activity than the heavily traded SPX and NDX.

The main takeaway from all this analysis is this. The DOW is now the important index to watch. If it turns lower from around current levels, and makes news lows, Major wave 4 should be completing. If it confirms a new uptrend, the uptrend should be limited to DOW 13,520. This will keep the Int. wave B correction counter rally in place, and Int. wave C would follow to complete Major wave 4. Should the DOW exceed 13,520 then the Major wave 4 completed alternate count would gain in probablity. This market has basically reached another inflection point.

SHORT TERM

Support for the SPX remains at the 1386 and 1372 pivots, with resistance at the 1440 and 1499 pivots. Short term momentum hit an extremely overbought level on friday and has started to pullback. Since the SPX has not made new highs during this recent rally we are still considering the expanding triangle Intermediate wave B, as posted on the hourly chart. Should the SPX continue to rally this count will be eliminated and the Int. wave iv low at SPX 1359, posted on the daily chart, will be preferred. If the SPX makes new highs, this would suggest a potential uptrend high within the OEW 1440 pivot range. The OEW 1440 pivot would align with the upper limits of the Int. wave B scenario in the DOW.

Currently this is a difficult market to trade with all the cross-currents between indices. Historically, the US stock market does not make much progress when the four major indices are out of sync. The last time this occurred was during the 2004-2005 period of the 2002-2007 bull market. Probabilities suggest, regardless of the short term direction over the next few weeks, the April lows in all four major indices will be revisited before Major wave 4 concludes.

Short term support is at SPX 1397, and then the 1386 and 1372 pivot ranges. Short term resistance is at SPX 1414, 1419 and 1422. Short term momentum hit an extremely overbought level on friday, highest since mid-March, and has started to pullback. This rally, from SPX 1359, looks like fives waves thus far: 1376, 1368, 1405, 1397, and 1407. Short term OEW charts have been positive since around SPX 1380. Best to your trading!

FOREIGN MARKETS

The Asian markets were nearly all lower on the week for a net loss of 0.6%. Only Australia and Indonesia, of the eight indices we track, are in confirmed uptrends.

The Europeans markets were nearly all higher for a gain of 1.0%. Not one of the seven indices we track are in confirmed uptrends.

The Commodity equity group was mixed on the week for a net loss of 0.8%. All three are in confirmed downtrends.

The DJ World index remains in a downtrend but gained 1.1% on the week.

COMMODITIES

Bonds are uptrending and gained 0.4% on the week. The 10yr rate traded below 2.0% all week.

Crude looks like it’s trying to establish an uptrend, after a positive divergence, and gained 0.6% on the week.

Gold is trying to establish an uptrend, after a two month correction, and gained 1.2% on the week.

The USD, which had been in a trading range for weeks, is now downtrending and lost 0.6% on the week. The EUR, potentially uptrending, gained 0.3%. The uptrending, and potentially topping, JPY gained 1.8%.

NEXT WEEK

Monday kicks off the economic week with Personal income/spending and PCE prices at 8:30. Then the Chicago PMI at 9:45. On tuesday we have ISM manufacturing, Construction spending and monthly Auto sales. On wednesday the ADP index and Factory orders. Thursday offers weekly Jobless claims, Productivity and ISM services. Then on friday the monthly Payrolls report. The FED has one activity scheduled for the week. And, an interesting one at that. FED governor Tarullo gives a speech at the Council on Foreign Relations, on wednesday, at 8:00 AM. Best to your weekend and week!

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Copyright © 2012 Tony Caldaro - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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