MAY SUPPORT LEVELS IN PLAY FOR STOCKS -- MAY RESISTANCE LEVELS IN PLAY FOR BONDS AND GOLD -- EURO STOX50 HOLDS ABOVE MAY LOW AS EURO BREAKS IT -- S&P 500 REMAINS WITHIN HUGE TRADING RANGE -- ABC CORRECTION DEPENDS ON FEBRUARY LOW
MAY LEVELS IN PLAY FOR STOCKS, BONDS AND GOLD... Link for todays video. The major stock index ETFs are getting a bounce off their May lows as bonds and gold hit resistance from their May highs. It is no secret that the Dow and S&P 500 are testing important support levels from their February lows. These February support levels were reinforced with bounces in May and a bounce over the last two days. Chart 1 shows the Dow SPDR (DIA) forming two long white candlesticks in May to affirm support in the 98-99 area. After a sharp decline last week, the ETF once again firmed in this area on Tuesday and Wednesday. Chart 2 shows the Nasdaq 100 ETF (QQQQ) firming above the February lows. QQQQ also formed two long white candlesticks in May to establish support in the 43-44 area. Firmness is one thing. Reversal breakouts are another. Stocks have yet to fully recover from Fridays gap-decline and Mondays sharp decline. The gap remains unfilled and the decline remains unrecovered. A break above these resistance levels is needed to put the bulls back in the drivers seat.
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Chart 1
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Chart 2
While DIA and SPY test support from their May lows, the Gold ETF (GLD) and the 20+ Year Treasury ETF (TLT) are challenging resistance from their May highs. Testing reflects vulnerability. Challenging reflects strength. Chart 3 shows GLD surging back to 122 over the last three weeks. The ETF hit resistance here in early-mid May and then established support around 114. This medium-term uptrend remains intact as long as the May low holds. GLD will most likely break resistance should the key stock indices break their May lows. Chart 4 shows TLT trading just below its May highs. Despite selling $21 billion of US Treasuries this week, bonds are holding up as bids remain relatively strong. As with GLD, the May low marks key support in the 95 area. No downtrend here unless TLT breaks the May lows. The indicator window shows stocks and bonds moving in opposite directions the last seven weeks.
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Chart 3
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Chart 4
EURO STOX50 HOLDS ABOVE MAY LOW AS EURO BREAKS IT... Weakness in stocks and strength in gold has been tied to the sovereign debt crisis in Europe and weakness in the Euro. This is the prevailing opinion. It is then interesting to note that the Euro Stoxx 50 Index ($STOX50) is trading above its late May low and showing a little relative strength. In contrast, the S&P 500 moved below its late May low (on a closing basis). The US can thank Fridays employment report for this lower low. Despite holding up a little better, chart 5 shows $STOX50 in a clear downtrend with a little wedge break over the last three days. This decline established key resistance with the early June high. Notice that $STOX50 peaked a week ahead of the S&P 500. A higher low in June and break above resistance could be quite positive for US stocks. It aint happened yet though. Chart 6 shows the Euro ETF (FXE) with a move below its May lows this month. Even though the Euro remains out of favor, Euro stocks are holding above their May lows. Perhaps there is a silver lining in Euro weakness. Namely, a weak Euro makes European exports more competitive.
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Chart 5
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Chart 6
S&P 500 REMAINS WITHIN HUGE TRADING RANGE... A number of readers have asked for an update on the Elliott Wave count. At the risk of opening Pandoras box, I will oblige with some simple wave counts. Keep in mind that Elliott Wave is subjective and open to interpretation. First, it should be noted that the S&P 500 remains in a long-term trading range. And I do mean long-term. Chart 7 shows the S&P 500 as a 5-week EMA over the last 21 years. The red line is a 52-week EMA. After a long bull market from 1991 until 2000, the index moved into a sideways pattern. No, I do not see a massive head-and-shoulders pattern here. SPX first crossed above 1100 in early 1998 and has since crossed this level at least nine times in the last 11 years. A consolidation is pretty normal after a big advance. My initial thoughts are to label this flat ABC correction. A signal zigzag consists of three waves (ABC). It is possible that a double zigzag evolves with three more waves (WXY). A lot is possible with Elliott Wave :) See page 45 in Elliott Wave Principle by Frost and Prechter. This book also shows expanding horizontal triangles that consist of five waves (ABCDE). These are basically broadening formations, but Elliott Wave considers these as bullish corrective patterns after a sharp advance. Such a pattern would project a wave D high just above 1500 and a Wave E low just below the Wave C.
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Chart 7
ABC CORRECTION DEPENDS ON FEBRUARY LOW... Turning to the current advance, the Elliott Wave count for the S&P 500 on chart 8 looks like a five wave advance. John Murphy and I put this count forward many times. The peak around 1200 marks the end of Wave 5 and the S&P 500 could now move into a corrective pattern. Why a corrective pattern from here? Impulse patterns consist of five waves and impulse patterns are followed by corrective patterns. Check Frost and Prechter for an array of corrective patterns. Should the S&P 500 be poised for an ABC zigzag correction, the first step is a break below the February lows. Such a break would provide the perfect setup for a Wave B advance. The February lows in the Dow and S&P 500 are all over the news. Sentiment would likely turn quite bearish on such support breaks and this would provide the setup for a bounce. The market has a funny way of rallying right after well publicized support breaks. A Wave B advance could extend towards the 1150 area and form a lower high in August. After a classic summer rally, Wave C could begin just in time for a September-October debacle. This script seems almost too perfect. The complete ABC pattern could end up retracing 50-62% of the prior five wave advance. We could even see an overshoot on the downside. First, another leg down would likely be accompanied by more bad news. Second, September and October are known for their selling climaxes.
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Chart 8
WAVE 5 MAY BE YET TO COME... Elliott Wave is subjective and the February low has yet to be broken. A correction starts with a break below the prior reaction low. As long as the February low holds, it is possible that the current uptrend resumes and there could be a wave 5 in the future. This means the July-April advance was Wave 3 and the current decline is Wave 4. Should the S&P 500 hold the February low and break above 1100, it is possible that we could see a Wave 5 rally above the April high. Yes, I can hear the cat calls now. We must keep an open mind because anything is possible in the stock market.
