Weekend Update: Downtrend Likely Bottomed

After a gap up Monday to SPX 1627, the market pulled back to 1605 on Wednesday, then gapped up again Friday and hit 1632. For the week the SPX/DOW were +1.55%, the NDX/NAZ were +2.00%, and the DJ World index was +0.70%. On the economic front positive reports continued to lead negative ones. On the uptick: ISM manufacturing, factory orders, the ADP, the Payrolls report and weekly jobless claims improved. On the downtick: ISM services, the WLEI, the M1 multiplier and the trade deficit widened. Next week we get the FOMC minutes, the PPI and Consumer sentiment.

LONG TERM: bull market

We continue to count this bull market as Cycle wave [1] of a multi-decade Super cycle bull market. Cycle wave bull markets are created by five Primary waves. Primary waves I and II ended in 2011, Primary III has been underway since then. Primary I divided into five Major waves, with a subdividing Major wave 1. Primary III is also dividing into five Major waves, but both Major waves 1 and 3 are subdividing into five Intermediate waves. Major waves 1 and 2 of Primary III completed by mid-2012, Major wave 3 has been underway since then.

Intermediate waves i and ii, of Major 3, completed by late-2012. Intermediate iii just completed in May, and Intermediate wave iv probably completed in June. It appears, although not confirmed, Intermediate wave v is underway to complete Major wave 3. When Major 3 ends, a Major wave 4 correction will follow. Then a Major wave 5 uptrend to new highs will end Primary wave III. After a Primary IV correction, a Primary wave V uptrend will likely end the bull market. We have been expecting the completion of this bull market pattern by late-winter to early-spring 2014.

MEDIUM TERM: downtrend probably bottomed

We were expecting an Intermediate wave iii uptrend high in May, then an Intermediate wave iv downtrend low in June. The uptrend had a price peak around mid-May at SPX 1687, then corrected in a complex abc pattern down to 1560 by late June. The entire downtrend declined 7.5%, which was in between the 4.5% to 9% correction range of previous Intermediate wave iv’s. Since that low we have counted a five wave pattern into Monday’s SPX 1627 high, then a pullback to 1605 by Wednesday. We had labeled the rally Minor wave 1 of Intermediate wave v, and the pullback Minor wave 2. With the rally off that low, to a higher high on Friday (SPX 1632), we have anticipated Minor wave 3 has been underway.

Technically we have observed a rise off a very slight positive divergence on the daily RSI, and the MACD cross higher for the first time since May. The SOX and R2K continue to uptrend from April, the SPX sector XLY has confirmed an uptrend, and the VIX confirmed a downtrend. The general market appears to be gathering upside momentum. With Minor wave 1 reaching our target of the OEW 1628 pivot, and Minor 2 bottoming higher than our projected SPX 1593-1599 range. We now expect Minor 3 to challenge the OEW 1680 pivot during July. Medium term support is at the 1628 and 1614 pivots, with resistance at the 1680 and 1699 pivots.

SHORT TERM

Short term support is at the 1628 and 1614 pivots, with resistance at SPX 1636-1640 and SPX 1648-1649. Short term momentum ended the week quite overbought. The short term OEW charts remain positive with the reversal level now at SPX 1615.

After counting a potential Intermediate wave iv low at SPX 1560 we counted a five wave structure for Minor wave 1 SPX: 1586-1573-1620-1606-1627. Then the market produced an abc structure for Minor 2 SPX: 1613-1624-1605. Now we are seeing another potential five wave structure underway for Minor 3 SPX: 1627-1615-1632 so far. The advance from the SPX 1560 low continues to look impulsive. Which is what we would expect during a new uptrend. At this point, only a drop below SPX 1605 would force a change in our short term wave count. Best to your trading!