Friday, August 6, 2010

S&P500 Technical Analysis Base On The Elliott Wave Theory (Part-4)

S&P500 Technical Analysis Chart: "Click on the chart to zoom in."

S&P500 has formed a rising wedge, which from technical stand point is a bearish formation. I will provide two scenarios.
Bearish scenario: If S&P500 breaks the wedge, it will fall like a stone and surprise many traders. It should tanks to 1094 there is some support at 1094, but I think it will break 1094 and tanks to 1070-1056. Please note S&P500 could get a bounce from 1070-1056. If S&P500 tanks to 1040, there is a good chance it falls to 950 by end of September. It would mark the end of sub-wave (3). I give 70% chance to violation of wedge formation and big drop in coming week.

The bullish scenario would come to play if S&P500 get above 1131 resistance level and stays above it for a couple days. My bullish target for S&P500 would be 1170. I think 1028 would be a good candidate for sub-wave(2), but if S&P500 get above 1131 I have to adjust my target to 1170 instead. At this point I give 30% chance to my bullish scenario to become reality.

Big picture: Base on Elliott Wave Theory, S&P500 finished the leg#1 in the March 2009 and from March 2009 to the April 2010 S&P500 has made the leg#2 (see the chart in pink). I think we are in the leg#3 that would be the strongest wave down. Note each wave is made of 5 sub-waves. The leg#3 will be the biggest of 5 waves structure and should finish sometimes in 2011-2012. On the other hand if the Federal Reserve Bank intervenes in market by quantitative easing it will provide artificial liquidity and cause the market to rally hard in this case S&P500 would rally to 1300. Quantitative easing is the last bullet left in federal reserve bank's arsenals, do not count on it. It naive to think Bernanke is going to use it at this point. If the federal reserve bank would use it now, what are they going to do when Europe crisis get worse?

Please note fundamentals are very weak and would not support the rally to 1300. Today unemployment data was horrible as you see in the graph below the employment situation got worse than last bear market as you see in the chart we are much lower compare with 2003 bottom therefore the Wall Street comparison of this rally to 2003-2007 rally is just a mirage. In the last recession consumer mortgage their houses and took advantage of easy credit market, but this time there is no easy credit, and housing market is a mess. The U.S. congress has failed to address the housing crisis. Instead of going after cause they went after symptoms. Government did not do anything effective to stop the foreclosures. If bankers modify loans thay have to writedown those loans in their quarterly earnings, but if they keep them as it is they are not obligated to report their delinquent loans as losses. The number of modify loans is a big joke. It’s obvious someone who is unemployed for a while it is likely to default on his/her mortgage. High unemployment speeds up this vicious cycle.

Congress came with a stupid excuse that they did not have any tools to deal with a big financial institution who could cause a systematic risk. Oh really! Do they think their constituents are a bunch of dummies who believe any nonsense they tell us? It was insulting to my intellect, what are they thinking?

In March of 2008 they witnessed how Bear Stearns collapsed in matter of days. How couldn't see there might be more shoes to drop. From March 2008 to September 2008 that Lehman Brothers collapsed they had plenty of times to pass a legislation to deal with too big to fail institutions, but they did not! They made the wrong choice and bail them out. They should have put all insolvent financial institutions in FDIC receivership then injects liquidity to the economy through them. Instead they bailed them out. Bankers put the money in the stock market and shot the market higher instead of lending to businesses.

Congress just kicked the can down the road. It’s sad to see financial lobbyists could influence the financial reform bill and water down the Volcker rule. Please note that the new bill does not address too big to fail and despite president Obama claim if one of these insolvent institutions like bank of America or City group failed taxpayers are end up paying for them.

Hours of work Graph:
"Click on the chart to zoom in."