1929 vs 2009

From Tony Caldaro
http://caldaroew.spaces.live.com/

LONG TERM: bear market
We are currently in a Supercycle, or best case Cycle, bear market. Historically, in the US, these types of bear markets last anywhere from 23 months (1973-1974) and 60 months (1937-1942). The Supercycle bear market of 1929-1932 lasted 34 months. Outside of the US, Japan has been in a Supercycle bear market for 20 years (1989-....). The decline from the October 07 high to the recent March 09 low took seventeen months. If the Supercycle/Cycle bear market ended there it would be the shortest on record. Most of these types of bear markets unfold in three waves. In the first wave the market loses about 50% of its value, confirming the degree of the bear market. Lesser degree bear markets do not lose this much value. The second wave rallies about 50% from the lows, giving hope that the bear market is over. Then during the third wave the market loses another 50% of its value, and this usually ends it. From Oct07 (SPX 1576) to Mar09 (SPX 667) the SPX lost 58% of its value, we labeled this decline as Primary wave A. Over the past five months the SPX has rallied 54% to 1028 on friday. We have been labeling this entire rally as Primary wave B. Wave B rallies, in this type of bear market usually rally 50% off the lows, and can even retrace 50% of the decline, i.e. 1929-1932 and 1937-1942. Upon completion of Primary wave B the next wave down, Primary C takes hold. In the 1937-1942 Cycle bear market, it retested the lows. In the 1929-1932 Supercycle bear market, it paused at the lows and then broke much lower. Currently we favor the latter scenario.
We have been monitoring the relationship between a more recent bear market and our current bear market. In that bear market one Primary downwave took seventeen months, the other Primary downwave took ten months, and there was a five month Primary upwave in between. Our bear market is following the same track: Primary A seventeen months, Primary B five months so far. Should this relationship continue, our Primary wave B should end this month, and Primary wave C should bottom in June 2010. Also of note, in the historical model, both Primary downwaves wiped out an equal percentage of market value. This would suggest that the SPX will lose another 58% of its value from the Primary wave B high, during Primary C. Primary wave A wiped out 58% of market value.
During Primary wave B we have maintained an upside target of between SPX 1002 (50% rally), and SPX 1122 (50% retracement). We projected these levels when the SPX was in the low 700's in March. It appeared quite outrageous to most at the time as bearish sentiment was abundant. Now that we have reached the targeted range the tables have turned. Bullish sentiment is quite abundant. In fact, one of our OEW members Martin N. alerted us to the Aug09 Merrill Lynch portfolio manager survey. Fund managers are the most bullish they have been since November 2003, and their expectations for corporate profits are the best since January 2004. That was the top of Primary wave III in the last bull market: http://www.bizjournals.com/tampabay/stories/2009/08/17/daily55.html?ana=from_rss. This is the appropriate level of bullishness to end a Primary wave. When Primary C gets underway in earnest most will be stunned. Personally, I hate to see people lose money. So please feel free to post part or all of this weekend update wherever you wish.
MEDIUM TERM: uptrend makes new highs
Primary wave A took the form of a detailed zigzag. It divided into three Major waves: A (Mar 08 SPX 1257), B (May 08 SPX 1440) and C (Mar 09 SPX 667). Since Primary wave B is a counter rally to the overall bear market trend, we expected it to unfold as a zigzag as well, with three Major waves, and it has: A SPX 956, B SPX 869 and C underway with SPX 1028 the current high. To further confirm that Primary wave B is corrective, and not impulsive as in bull markets. Each of the three Major waves have unfolded as zigzags as well. Major wave A: Intermediate wave A (SPX 833), wave B (SPX 780) and wave C (SPX 956). Major wave B was a simple zigzag between SPX 956 and SPX 869. Major wave C: Intermediate wave A (SPX 1018), wave B (SPX 879) and wave C underway. Since all of these Intermediate waves, that formed the three Major waves, have been five wave structures. We're expecting Intermediate wave C, of Major wave C, of Primary wave B, to also be a five wave structure. In EW terms Primary wave B would be called a double zigzag: 5-3-5-x-5-3-5.
Nearly everyone of the Intermediate waves in the entire bear market, and all of the Major waves have ended at/near long term OEW pivots. Especially during the uptrends. The next long term OEW pivot is at SPX 1041. This area would meet the minimum requirements for the Primary wave B structure, and fits well within the overall bear market structure. In this OEW 1041 pivot area the current Intermediate wave C would equal 38.2% of Intermediate wave A, and the entire Major wave C would equal 61.8% of Major wave A. Should the market dodge the bear market bullet next week, the next long term OEW pivot is at SPX 1107.
In reviewing the charts we noticed some additional technical evidence of an impending Primary wave B top. We already mentioned the confirmed downtrend in China, which has actually been leading world markets higher, it bottomed with Brazil in Nov08. Also, all the Asian markets were lower this week while western markets made new highs. We also noticed, in no order of importance, the following:
1. Corporate bond risk gapped up for the week, for the first time since Sept/Oct08.
2. The (BDI) Baltic Dry Index, which led the markets higher, has been downtrending for over two months, and
3. The put/call ratio hit its most dangerous daily level and weekly levels since Dec07, illustrating extreme speculator bullishness.
SHORT TERM
Support for the SPX is now at 1018 and then 990, with resistance at 1041 and then 1061. Short term momentum is extremely overbought. As noted above, Intermediate wave C of Major wave C should unfold in five waves. From the recent Intermediate wave B low (SPX 979) on monday, we're counting the rally to SPX 991 on tuesday as Minor wave 1, and the pullback to SPX 981 on wednesday as Minor wave 2. The rally from that low certainly looks like a third wave, and we're labeling it Minor wave 3. Early next week we expect a small pullback for Minor wave 4, and then a rally to the OEW 1041 pivot for Minor wave 5. This should conclude Primary wave B. Should the SPX break through the 1041 pivot (SPX 1049), then a further push to the 1061 pivot would appear likely. Remember, we're expecting Primary wave B to end this month. If it does not, then an extended Major wave C is most likely underway.