Stock Market Trifurcation Continues

By: Toby_Connor

Another wild week as the trifurcation of the major indices continues. The market gapped down from SPX 1691 on Monday, continued lower until Wednesday hitting 1646, then reversed like a rocket into Friday’s 1703 close. In the meantime, the government shut down moved into its second week and the debt limit looms large this Thursday.
For the week the SPX/DOW were +0.95%, the NDX/NAZ were -0.35%, and the DJ World gained 0.8%. On the economic front reports were sparse, only four, and negatives outnumbered positives 3 to 1. Consumer credit increased, but consumer sentiment and the WLEI declined, while weekly jobless claims rose. Next week we may/or may not get reports on Housing, the NY/Philly FED, Industrial production and the FED’s Beige book.

LONG TERM: bull market

We noted last weekend that the DOW, SPX and NDX/NAZ all appeared to be moving in different directions. The DOW has been weak, the NDX/NAZ strong, and the SPX caught somewhere in the middle. This ongoing activity, that actually first appeared in August, has resulted in a plethora of potential waves counts from many market pundits. And, has made trading quite difficult for many, including us, since we lean on the bellwether DOW. Kudos to those that have caught these recent swings.

When the stock market becomes difficult to track one has to rely on their years, if not decades, of experience. In OEW, patterns often repeat. But not always exactly the same exact way. Our objective has always been to offer the most probable count, and then project, monitor and adjust when necessary. Since we do not have a crystal ball, the market sometimes deviates from the most probable count. When this does occur, patience is required until the market’s most probable count reappears. The one thing we have known during these volatile few months is that we are still in a bull market. In bull markets, one should always have a core long position and trade/hedge when a correction is likely. In bear markets, one’s core position should be cash or a core short position and trade accordingly. Trying to build a nest egg from just trading, requires excellent money management and trading skills. Keep in mind 90% of traders fail.

After a thorough review of the four major indices, and their relationships to each other, we have arrived at three potential counts. Remaining objective, and with the bellwether DOW as the foundational index we offer these counts, one by one, below in their order of preference, using the DOW charts to avoid as much confusion as possible.

The first chart is our current count posted on the public DOW charts. We pick up the bull market count from 2011 for analysis purposes. As you will note, Major waves 3 and 4 completed in early 2011 and the next rally ended Primary wave I. Now in mid-2013 we observe a similar pattern which ends Primary III. During the first decline of Primary II the DOW dropped about 1,000 points. Then it spiked up about 900 points before rolling over and dropping 2,000 points into its Primary II low. This was a choppy and difficult pattern to track at the time. Recently the DOW dropped about 1,000 points again. Then starting this Wednesday it spiked up over 500 points. This Primary wave II to IV comparison suggests we could have some more upside left, before this rally peaks short of a new high, and then heads lower. Since Primary II was what we term an elongated flat. Primary IV now appears will be a zigzag, alternating with that flat. Should the DOW make new highs during this advance we need to consider the next count.

This count suggests Primary III is still underway. And, a Major wave 4 irregular-flat has made an alternating pattern with the Major wave 2 zigzag. Major wave 5 of Primary wave III would currently be underway. Should the DOW’s new highs exceed 16,200 we need to consider the next count.

The last count is even more bullish than the two preceding counts. Using OEW we have examined all the trends of the four major indices, and this count eliminates the trifurcation. This count suggests that Intermediate wave v of Major wave 3 is subdividing into Minor waves. Something this market has not done during its entire bull run. This is the potential asset bubble count, one could say. This count would extend the bull market well into 2014 and possibly 2015. While it would be fun participating in a blow off top. The bear market to follow would be steep and swift. That’s the three counts with their parameters. The market will determine which of the three it will chose. All three charts are posted at the very end of the stock charts link below.

MEDIUM TERM: DOW downtrend, SPX/NDX/NAZ uptrend

We have to go back to near the end of June to find when all four major indices last bottomed in confirmed downtrends. After that they all advanced in confirmed uptrends into early August, and it is at that point that they started to diverge. The DOW confirmed a downtrend into late August, an uptrend into mid-September, then another downtrend into early October. The NDX/NAZ never confirmed any of these downtrends, and has remained in an uptrend since late-Jun. The SPX has been quite choppy, but has remained in an uptrend since late-June as well. Normally, when the four majors get out of sync like this, we have just relied on the DOW until they re-sync again. The futures market has a tendency to occasionally create noise in the heavily traded ES/SPX and NQ/NDX. The past few months has certainly been one of those times.

Currently we have the SPX/NDX/NAZ all in uptrends, and the DOW trying to re-establish a new uptrend. The key, at this juncture, is what the DOW does in the coming weeks to confirm one of the three patterns noted above. Keep in mind, we have been in a bull market since March 2009. And, regardless of the recent gyrations in the major indices that has not changed. What is being sorted out by the market, is the wave pattern that will produce the eventual top in this four plus year bull run. Until something changes we continue to project a bull market top in late-winter to early-spring 2014. Medium term support is at the 1699 and 1680 pivots, with resistance at the 1779 pivot.

SHORT TERM

After reaching an all time high of SPX 1730 in mid-September the market declined in a corrective fashion until Wednesday’s low at 1646. Thursday’s opening pushed the market to its best rally since the decline began, and we labeled that low Intermediate wave a. Under the preferred scenario, Intermediate wave b should be underway now. This rally, however, has gone straight up from SPX 1646 to 1703 without any notable subdivisions. Thus far, it looks more like a kick off to something higher rather than just a B wave. How it unfolds over the next week or so should be quite important medium term.

Short term support is at the 1699 and 1680 pivots, with resistance at SPX 1730 and the 1779 pivot. Short term momentum ended the week extremely overbought. The short term OEW charts are positive from around SPX 1670, with the reversal level now 1684. Best to your trading!

FOREIGN MARKETS

The Asian markets were all higher on the week for a net gain of 1.9%.

The European markets were mostly higher for a gain of 1.6%. Both England and Switzerland are in confirmed downtrends.

The Commodity equity group were all higher for a gain of 1.4%.

The DJ World index is still uptrending and gained 0.8%.

COMMODITIES

Bonds continue to look like they are in an uptrend but lost 0.2% on the week.

Crude remains in a downtrend and lost 1.9% on the week.

Gold aborted its uptrend attempt and lost 2.9% on the week.

The USD may have recently bottomed and gained 0.3% on the week.

NEXT WEEK

With the government still partially shut down we may/may not get the following reports. Tuesday: the NY FED. Wednesday: the CPI, NAHB housing index and the FED’s Beige book. Thursday: weekly Jobless claims, Housing starts, Building permits, Industrial production and the Philly FED. Friday: Leading indicators. As for the FED. Monday: FED chairman Bernanke gives a speech at 9AM. Friday: FED governors Tarullo and Stein both give speeches. The weeks ahead should be quite interesting. 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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