Wednesday, June 29, 2011

Update on DJIA and Crude Oil

We have started a counter-trend rally in the stock market and Crude Oil, but we are still seeing exhaustion signs in the economy and job market as consumer confidence declined further last month to 58.5 and jobless claims (4-week moving average) continues to stay above 400,000. A retracement of the declines that have unfolded over the last 8 weeks was fully expected as a bullish divergence started unfolding in both the RSI and the MACD, and a rally indeed started on Monday.

We start with crude oil. The decline from the top is still consistent with a leading diagonal, but the initial decline took longer than expected. Here is the intermediate term chart showing where crude oil may be going next.

The duration of the decline from the peak, as well as the presence of a triangle, is indicative that the initial decline is Minor wave 1 down. A three wave initial decline from the top with a triangle for wave B points to a leading diagonal for Intermediate wave (1) down. We are on Minor wave 2 up, which should retrace 66% to 81% of Minor wave 1, which points to an upside target of $108 a barrel to be reached in early August 2011. We are also on course for Intermediate wave (1) to last a Fibonacci 8 months with a downside target of $76 a barrel to be reached around February 2012.

The socionomic indicators are still consistent with Primary wave [3] down in progress for crude oil. The Obama Administration is no longer putting pressure on Big Oil. This reprieve will likely be temporary, as it is possible that the Obama Administration will put pressure on Big Oil once again as gas prices at the pump and crude oil climb again. There are already indications of possible future actions by the Obama Administration on the issue, with the tapping of the Strategic Petroleum Reserve on June 23, 2011 in which 60 million barrels of oil were released (the United States contributed 30 million of the total) with a possibility of further action in the future. This is something to keep an eye on in the intermediate term future.

Now a look at the DJIA. We are now in the midst of a counter-trend rally within a larger-term decline. Here is a chart of the DJIA updating our current position and the intermediate term outlook.

First is the wave count within Primary wave [2] up. The bear market rally unfolded as a zigzag with the peak in early May 2011. Shown on the chart is Intermediate wave (C) of the bear market rally, which can now be characterized as a five wave advance. Within the Intermediate degree advance, Minor wave 1 unfolded as a leading diagonal, Minor wave 2 unfolded as a zigzag, Minor wave 3 unfolded as an extended five wave impulse, Minor wave 4 unfolded as a running flat (thereby satisfying the guideline of alternation), and Minor wave 5 unfolded as a brief impulse. Notice that the entire advance is contained within the trend channels associated with Intermediate wave (C).

The lower trend channel associated with Intermediate wave (C) was breached to the downside in early June 2011, indicating a trend change and the start of Primary wave [3] down. The DJIA may be on course to backtest the lower trend channel in the near future.

Here is a chart showing the close-up of the decline from the peak and the short term outlook.

As the chart shows, a short term rally has started. The decline from early May 2011 to late June 2011 is best labeled as Minute wave [i] down. The initial decline is actually a five wave structure. A close-up of Minuette wave (v) actually shows it to be a five wave impulse in the DJIA, S&P 500, and the Wilshire 5000. Minute wave [ii] is in progress and is expected to last around 4 weeks with an upside target of 12500 on the DJIA and 1239 on the S&P 500, both to be reached around July 25, 2011. The targets represent a 61.8% retracement of Minute wave [i].

After Minute wave [ii] up ends, the decline will resume with a downside target of 10125 for Minor wave 1. Previously, Minor wave 1 down was predicted to last 3 months and take the DJIA down to 9500. As the longer term projection of the DJIA indicates, Minor wave 1 down is on course to last 5.5 months, which again is consistent with a 5 year duration for Primary wave [3] down.

The socionomic indicators are consistent with Primary wave [3] down in progress. Here is a list of developments that have unfolded since early May 2011:

1 -- Exhaustion in the job market and the economy. The economy created only 54,000 jobs in May 2011. Consumer confidence is falling with the most recent reading at 58. Manufacturing is down. Jobless claims continue to stay above 400,000 week after week. The exhaustion signs are being attributed as "bumps in the road" by economists and politicians, which is consistent with the "Slope of Hope" phase in the bear market.

2 -- Epidemic of cyber attacks, which started in early May 2011. The timeline is here. This development is associated with an increasingly bearish social mood.

3 -- Increasing authoritarianism at the state level, especially in the red states. Since the start of Primary wave [3] down, the GOP has been more aggressive in passing legislation aimed at busting unions, voter suppression, tough immigration laws, and curbing abortion (going as far as defunding Planned Parenthood). The trend of increasing authoritarianism is consistent with a bearish social mood.

4 -- Outbreak of protests in Michigan, Indiana, Wisconsin, New Jersey, and Florida over collective bargaining rights and unions under attack.

5 -- The resurgence of the Tea Party with the rise of Michele Bachmann in the polls in Iowa, the decline of Obama's approval rating, and the decline of Mitt Romney in the polls in Iowa and South Carolina.

6 -- Disappointing performances for Kung Fu Panda 2 and Cars 2. Disney, Pixar, and Dreamworks are all bull market franchises. The horror movie Insidious performed stronger than expected and displayed surprising staying power in theaters. We are in a transitional stage where bull market movies are falling out of favor while horror movies are finding increased success.

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