Stock Market Primary III Inflection Point

By: Tony_Caldaro

The week started off at SPX 2127. After a rally to SPX 2133 on Monday, completing eight straight days of higher highs/lows, the market headed lower for the rest of the week, with four straight days of lower highs/lows. For the week the SPX/DOW were -2.55%, the NDX/NAZ were -2.25%, and the DJ World index was down 2.0%. On the economic front positive reports edged out negative reports in a quiet week. On the uptick: existing home sales, the FHFA, leading indicators and weekly jobless claims improved. On the downtick: new home sales and the WLEI. Next week will be highlighted by the FOMC meeting, the first look at Q2 GDP, and the Chicago PMI.

LONG TERM: bull market

The five primary wave, Cycle wave [1], bull market from 2009 continues. This week, however, it has reached another inflection point in the Primary wave III pattern. Primary waves I and II completed in 2011, and Primary wave III has been underway since the October 2011 Primary II low. Primary I divided into five Major waves, with a subdividing Major wave 1 and simple Major waves 3 and 5. Primary III has alternated, with a simple Major wave 1, a quite extensive subdividing Major wave 3, and an anticipated subdividing Major wave 5.

This week’s market activity, however, suggests another inflection point has arrived in the four year long Primary III. More on this in the next section. When Primary III does conclude, the market should experience its largest correction since 2011 for Primary IV. Then after that wave ends, Primary V should take the market to all time new highs.

MEDIUM TERM: uptrend under pressure

After the downtrend low on July 8th at SPX 2045, the market rallied as expected and approached all time new highs on Monday. After completing three waves up to SPX 2133 on Monday, we expected a small pullback (20+ pts.) and then a resumption of the uptrend. By Wednesday, when the SPX made a double bottom at 2110, we thought it should move higher. By late Thursday morning, however, that support level was broken and the SPX continued its pullback. We noted the pullback was already larger than what was expected in the Thursday update. On Friday the market broke through SPX 2100 and continued even lower. This is not what was expected at all, since the uptrend from SPX 2045 – 2133 had only displayed three quantified waves: 2074-2051-2133. Should the pullback continue and the SPX drop below 2074, then we would have another corrective uptrend, and this does not fit with our subdividing Major wave 5 scenario. The DOW, which has been leading lower, has already overlapped its first wave of three waves.

As a result of this week’s activity we took a good look at our charts and indicators. We had been expecting Major wave 5 to subdivide into five Intermediate waves for two basic reasons. First, the ongoing EQE in Europe. Second Primary waves in extended bull markets have always unfolded in Fibonacci years. While the sample is relatively small for 135 years of data, this suggested a Primary III top in 2016. Which still may occur. After reviewing the charts, however, we observed several negatives in some technical indicators and various indices. Our long term indicators are again displaying four negative divergences, which is what occurred at the 2011 Primary I high. We recently had four negatives, but one which was resolved positive has been now been replaced by another negative. Market breadth, as measured by the NYAD, has not confirmed the new uptrend and is nearly making lower lows from the April high. The SPX/DOW monthly MACDs remain on sell signals like they had in 2011. The Transports have not made a new high since 2014, may have ended their Primary III in December, and have been in a steady downtrend since February. The decline in US oil production has certainly had an impact on this index. The NYSE has not confirmed a new uptrend, and could have ended Primary III with a five wave ending diagonal in May.

The DOW did not confirm a new uptrend either, and has nearly retraced its entire July rally as it has led the market lower this week. All three of these indices not confirming uptrends during the recent rally is definitely worth noting. During the recent rally the NDX/NAZ rose to new bull market highs, which is somewhat unusual if the general market is indeed in Primary wave IV. We can, however, observe a similar occurrence in 2011 at least in the NDX. It made new highs then while the general market was in Primary II. Overall we can now conclude the diagonal triangle in the SPX could have been an ending diagonal for Major 5, and not a leading diagonal for Intermediate wave i of Major 5. An ending diagonal would be the most conservative count. Then if we can discount the potential positive impact of the ECB’s EQE, since the SPX has hardly responded to it after six months. And, consider the Fibonacci years relationship as too small a sample compared to the current technical damage in the general market. We could conclude Primary IV is underway. While the market is currently about 2+% from its all time high, it is probably a good time to get defensive until this inflection point clears. Medium term support is at the 2070 and 2019 pivots, with resistance at the 2085 and 2131 pivots.

SHORT TERM

After an eight day rally from the SPX 2045 downtrend low the market had advanced in three waves to SPX 2133. This week, however, the market has declined to SPX 2077, with only one notable bounce along the way. Should the market drop below SPX 2074, then we have the potential for another corrective uptrend. This would not be good for the market medium term. Should the market then drop down to SPX 2044, the entire uptrend would have been corrective and fully retraced. Another negative. The second scenario would suggest Primary wave IV is probably underway. For the market to confirm that scenario a further drop to SPX 1981 would be required.

As a result of this week’s market activity we are again forced to carry two counts. The count we have been tracking for quite a while will remain on the SPX hourly chart, and the alternate Primary IV scenario will be posted on the SPX daily chart. Short term support is now at the 2070 pivot and SPX 2044, with resistance at the 2085 and 2131 pivots. Short term momentum ended the week extremely oversold.

FOREIGN MARKETS

Asian markets were all lower for the week losing 1.1%.

European markets were all lower as well losing 1.8%.

The Commodity equity group were all lower losing 4.9%.

The DJ World index is still in a downtrend and lost 2.0%

COMMODITIES

Bonds are trying to confirm an uptrend and gained 0.5%.

Crude remains in a downtrend losing 5.2.%.

Gold is still in a downtrend and lost 4.1%.

The USD is in an uptrend but lost 0.6%.

NEXT WEEK

Monday: Durable goods at 8:30. Tuesday: Case-Shiller and Consumer confidence. Wednesday: Pending home sales and the FOMC ends. Thursday: weekly Jobless claims and Q2 GDP (est. +2.0%). Friday: the Chicago PMI and Consumer sentiment. 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 © 2015 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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