S&P 500 STALLS AT 1000 - ELLIOTT WAVE COUNTS - S&P 500 RETURNS TO FALLING CHANNEL - US DOLLAR INDEX RECOVERS AFTER SUPPORT BREAK - GOLD REACTS TO SURGING DOLLAR

STOCKS CONTINUE AUGUST STALL... Link for todays video.
Stocks moved lower as the Fed began its two day meeting on Tuesday. The FOMC is expected to make its policy statement on Wednesday at 2:15PM, which means we may see some fireworks the next two days. The S&P 500 was down over 1% on Tuesday, which was the largest decline since the 1.96% decline on July 7th. Thats right. The index went over a month without a decline that exceeded 1%. September 7th to October 19th 2007 was the last time that happened. For what it is worth, the S&P 500 peaked on October 11th (2007) and was down over 15% by mid January 2008. Chart 1 shows the S&P 500 stalling around 1000 over the last six days. Overall, a broadening formation could be taking shape with resistance just above 1000. Even though the 13-day EMA remains above the 34-day EMA, the Percentage Price Oscillator (13,34,9) rolled over and touched its signal line. Upside momentum is waning and this could give way to a correction or consolidation.

Chart 1

ELLIOTT WAVE REVIEW... Some readers have been asking for an update on the Elliott Wave count. John Murphy and I put forth the bullish wave count shown on chart 2 in the March 13th market message. According to this count, a five-wave bear market was completed in March. The March-June surge represents the Wave 1 of what could be a five-wave advance. According to Elliott Wave theory, Waves 1-3-5 are impulse waves, while Wave 2-4 are corrective waves. Wave 3 is longer than Waves 1 and 5. This means that Wave 3 would have to be greater than Wave 1, which was around 266 points (March closing low to June closing high). This targets a move above 1140. Also according to Elliott Wave theory, a pullback during Wave 3 should not exceed the low of Wave 2. Therefore, we would have to revisit this wave count should the S&P 500 break below the July low.

Chart 2

THE BEAR ARGUMENT... With Elliott Wave open to interpretation, this leaves us with a bearish alternative that assumes the March low marked Wave 3 of a bigger five-wave decline. Chart 3 shows the March-August surge as an ABC correction. According to Elliott Wave theory, Wave 4 can be any type of corrective sequence. In addition, notice that Wave 4 retraced 38-50% of the prior Wave 3, which is normal for a corrective wave. Wave C is still underway, meaning that the trend since March remains up. If/when Wave C ends, it would signal the start of Wave 5, which is an impulse wave down. According to Elliott Wave Theory, Wave 5 must retrace at least 70% of Wave 4. Should Wave 4 peak around 1000, then Wave 5 would be expected to break below 800. It is also possible that Wave 5 breaks below the low of Wave 3.

Chart 3

SPX APPROACHES FALLING CHANNEL... Chart 4 shows the S&P 500 over the last three years. The bear market started as a civilized falling price channel, but things quickly got out of hand with the September-October plunge. This was a panic stage as the market fell into the abyss. With another sharp decline in February, market participants were pricing in a depression or severe economic calamity. Once the risk of depression/calamity subsided, market participants needed to quickly adjust expectations and this gave way to the March-June rally. Strong rallies take on a life of their own as momentum carries prices further than we expect. Even with this historic advance, the S&P 500 is just now approaching the lower boundary of the falling price channel. In addition, the S&P 500 is now back to the middle of the abyss. Youve come a long way baby (from the March low). However, the index is still 300 points below last summers high and below the prior falling channel.

Chart 4

DOLLAR INDEX SURGES ... The US Dollar Index ($USD) is at it again. After breaking below its June low at the end of July, chart 5 shows the index bouncing back with a surge above 79 the last three days. A bear trap could be brewing with this failed support break. While the snapback rally looks strong, we have yet to see follow through with an actual breakout. The falling 50-day moving average and late July highs mark resistance just below 80. In the bottom indicator window, we can see RSI making another bid to break above 50 to turn momentum bullish. Prior attempts in June and July were unsuccessful. Will August be the charm? For good measure, I would like to see the index break above 80 and RSI break above 60 to reverse this downtrend.

Chart 5

GOLD REACTS TO SURGING DOLLAR... In response to the surging US Dollar Index, chart 6 shows the Gold ETF (GLD) forming a lower high and falling sharply. There is a ton of resistance in the 95-97 area for GLD. With a high around 95 in August, GLD now has a lower high working. This is potentially negative, but the ETF has yet to break support. I am marking a support zone around 91. The four day pullback is tolerable as long as this support zone holds. However, a break below the late July low would reverse the 4-5 week uptrend and could lead to a test of the April lows. In the bottom indicator window, the charts for the US Dollar Index and the Gold-Continuous Futures form mirror images that reflect the inverse relationship between gold and the greenback. Watch the Dollar for clues on gold.

Chart 6

PROGRAMMING NOTE... John Murphy is on vacation this week. Arthur Hill will provide Market Message updates on Tuesday, Wednesday and Thursday afternoon. In addition, Arthur Hill provides commentary and video analysis on Tuesday and Friday mornings at Art's Charts .