Stock Market Trifurcation

By: Tony_Caldaro

While the stock market acted like business as usual: the SPX opened the week at 1692 and ended at 1691. The US government shut down on Tuesday due to lack of a budget, and a potential default looms as the debt limit is less than two weeks away. The political circus – democrats v republicans – continue to push for next year’s election talking points, while holding the American public and the economy hostage. For the week the SPX/DOW were -0.65%, the NDX/NAZ were +0.55%, and the DJ World index was -0.4%. On the economic front negative reports outpaced positive ones for the first time in quite a while. On the uptick: the Chicago PMI, ISM manufacturing and Investors turned more positive. On the downtick: the ADP index, ISM services, the Monetary base, the WLEI and weekly Jobless claims rose. Next week we may, or may not, get reports on Retail sales, Consumer sentiment and the FOMC minutes. Best to your week.

LONG TERM: bull market

While most of us agree this is a bull market. After all the SPX/DOW recently hit all time new highs. The trifurcation between the DOW, SPX and NDX/NAZ has produced a number of general market counts in the blogosphere. Quite confusing for most we would imagine. At OEW we try to tune out all the noise created by following a number of indices and just concentrate on one. The bellwether. The index that has a one hundred plus year history, is not heavily traded in the futures markets, and gets quoted every night on the news: the DOW. Certainly we track the popular SPX, and even the other indices. But when the four major indices start taking on a life of their own we always rely on the DOW.

For this entire bull market the DOW has provided clean, clearly defined waves. The SPX, NDX and NAZ unfortunately have not. This trifurcation reminds us of 1999-2000. Then the major indices were like they are now: strength in the NDX/NAZ, weakness in the DOW, and the SPX caught up somewhere in the middle. When the DOW made its last downtrend of the bull market in late 1999 it bottomed at DOW 9976. The SPX hit 1234 and the NDX hit 2300. Then in January 2000 the DOW ended its bull market at 11750, gaining 18% in its last uptrend. The SPX looked like it was topping in January too but continued on to SPX 1553 by March, gaining 26%. The NDX was the reason. It topped in March 2000 at 4816, gaining 109% in the blow off dotcom bubble. Irrational exuberance. We all know what happened next.

The catalyst then was the “new economy” and easy money. Is the catalyst this time quantitative easing? There are quite a large handful of momentum stocks already selling at valuations that are discounting the next five to ten years of earnings growth. Twitter just filed for its IPO. They are not making any profits, nor have they made any profits, but they are valuing their company in excess of $9 billion. Sound familiar? It should. The way things currently look we could have quite a wild ending to this bull market.

For now we continue to track this five Primary wave Cycle wave [1] bull market in OEW terms. Primary waves I and II completed in 2011. Primary wave I divided into five Major waves with a subdividing Major wave 1. Primary wave III has also divided into five Major waves, but both Major waves 1 and 3 subdivided. Major waves 1 and 2 of Primary III completed by mid-2012. Major waves 3 and 4 completed by mid-2013. Major wave 5 was probably simple and just completed in September, ending Primary wave III. The recent decline appears to be Primary wave IV. When this concludes a simple Primary V uptrend should take the market to all time new highs to end the bull market. We are still expecting this to occur by late-winter to early-spring 2014 near the OEW 1779 pivot.

MEDIUM TERM: uptrend weakening

After the Intermediate wave iii, of Major 3, high in May all four major indices corrected into an Intermediate wave iv low in June. Since then, yes it has been that long, the NDX/NAZ have been displaying strength, the DOW weakness, and the SPX has been caught in the middle. We labeled the simple, five wave, Jun-Aug uptrend as Intermediate wave v ending Major wave 3. Then the market trifurcated. The DOW confirmed a downtrend and dropped 5.7%. The SPX dropped 4.9% and the NDX dropped only 3%. This is when a plethora of counts arrived on the EW scene.

While the downtrend was shorter than expected in the SPX/DOW. It was sufficient to trigger a downtrend which we labeled Major wave 4. Then the market shot right up quickly to new all time highs on non-taper rumors and the non-taper news. The day after the non-taper news the SPX/DOW made their highs and have been declining ever since. We can label that high as the end of Primary III, with Primary IV currently underway. The DOW has already dropped 4.9% and the SPX 3.5%. But the NDX/NAZ are less than 0.5% from their highs. Trifurcation.

For now we take the conservative count as posted on the SPX charts: Primary III done and Primary IV underway. We do offer an alternate count which is posted on the DOW charts. But until the SPX 1730 highs are exceeded we prefer the Primary IV underway scenario. Medium term support is at the 1680 and 1628 pivots, with resistance at the 1699 and 1779 pivots.

SHORT TERM

The decline from SPX 1730 looks like a double zigzag. The first zigzag, SPX 1730-1675, we labeled Minor a. The rally to SPX 1697 we labeled Minor b. Then the recent decline to SPX 1670 we labeled Minor c to complete Intermediate wave a. Under the Primary IV scenario we would expect a potential flat to form consisting of Major waves A, B and C. This first decline, SPX 1730-1670, should be the first wave of the three Intermediate waves creating Major wave A. Intermediate wave b, currently underway, is the second wave. Upside potential is SPX 1693 (38%), SPX 1700 (50%) and SPX 1707 (62%).

Short term support is at the 1680 pivot and SPX 1654-1665, with resistance at the 1699 pivot and SPX 1730. Short term momentum ended the week nearly overbought. The short term OEW charts are positive with the reversal level SPX 1688.

FOREIGN MARKETS

The Asian markets were mixed on the week for a net loss of 1.1%.

The European markets were also mixed but gained 0.8%. The FTSE is downtrending.

The Commodity equity group were mixed for a net loss of 0.7%.

The DJ World index is still uptrending but lost 0.4%.

COMMODITIES

Bonds appear to be uptrending but gained only 0.1% on the week.

Crude is downtrending but gained 0.9% on the week.

Gold is downtrending and lost 1.9% on the week.

The USD is downtrending as well and lost 0.1% on the week.

NEXT WEEK

Some of these reports may be delayed or not reported due to the government shutdown. Monday: Consumer credit at 3:00. Tuesday: the Trade deficit. Wednesday: Wholesale inventories and the FOMC minutes. Thursday: weekly Jobless claims, Export/Import prices, and the Treasury Budget. Friday: Retail sales, the PPI, Consumer sentiment and Business inventories. As for the FED there is a speech by FED governor Powell on Friday. Best to your weekend and week!

CHARTS: http://stockcharts.com/public/1269446/tenpp

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After about 40 years of investing in the markets one learns that the markets are constantly changing, not only in price, but in what drives the markets. In the 1960s, the Nifty Fifty were the leaders of the stock market. In the 1970s, stock selection using Technical Analysis was important, as the market stayed with a trading range for the entire decade. In the 1980s, the market finally broke out of it doldrums, as the DOW broke through 1100 in 1982, and launched the greatest bull market on record. 

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Copyright © 2013 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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