This article is written by Tony Caldaro, New York based investor, and reprinted with permission - for a full version and daily updates please check out his blog

The market ended lower this week after many traders returned from the year end holidays. The economic reports for the week continued to display a weakening economy, and most were in line with expectations. On friday the Labor Dept. reported that the unemployment rate had reached 7.2%: http://research.stlouisfed.org/fred2/series/UNRATE?cid=12. For the week the SPX/DOW were -4.65%, and the NDX/NAZ were -3.45%. Bonds and the USD edged higher, (both +1.0%), but the Euro (-3.4%), Crude (-11.9%) and Gold (-2.7%) were lower.

LONG TERM: bear market

The Cycle wave bear market of October 2007 continues. Thus far, equity markets worldwide have declined on average about 50%. This decline is typical of a Cyclical bear market as demonstrated by the two previous Cyclical bear markets of the past several generations: 1937-1942 and 1973-1974. The opportunity still remains for the US and World economies to avoid a devastating Supercycle bear market like that of 1929-1932. Confidence in governements and their financial systems need to be re-established. This is discussed below in the Commentary. From an OEW perspective this bear market continues to unfold in a multi-year ABC. We continue to label the recent low at SPX 741 as the end of the A wave of the bear market, Primary wave A. The SPX weekly chart, (see chart link below) displays the internal count of Primary wave A, exactly as we have counted it while it unfolded. Primary wave A subdivided into three Major waves, and each Major wave subdivided into three Intermediate waves. In Elliott wave terms this is commonly referred to as a double zigzag. With the expectation that this count is correct, we continue to expect this market to retrace 50% of Primary wave A, before Primary wave B ends, and the market enters the next and last stage of the bear market, Primary wave C. Two of the bear markets mentioned above included a 50% retracement before entering wave C. The other, 1973-1974 ended on the 50% decline. We are, however, maintaining an alternate count which is illustrated on the DOW charts. This count suggests another new low, to complete Primary wave A, before the 50% retracement rally occurs. Thus far the SPX has retraced 24.3% of the entire bear market during the current uptrend.

MEDIUM TERM: uptrend continues from the SPX 741 low

After the market bottomed in late November we expected a choppy uptrend retracing 50% of the bear market. This rally should consist of three Major waves, and each of the Major waves should subdivide into three Intermediate waves. The abc activity during bear markets is what makes them so difficult to track. Thus far, it appears the SPX has completed only Intermediate waves A and B of Major wave A. Counting from the SPX 741 low, Intermediate wave A ended at SPX 919 and Intermediate wave B at SPX 857. From the Intermediate wave B low, the SPX rallied to a new high for the uptrend at SPX 944 on tuesday. This was labeled Minor wave A, and the pullback, Minor wave B, is currently underway. When this pullback ends the SPX should again rally to new highs for the uptrend. Intermediate wave A rallied from SPX 741 to 919, (178 points). Counting from the Intermediate wave B low at SPX 857, the recent rally to 944, (87 points), defines the ongoing Intermediate wave C as only 50% of Intermediate wave A, (87/178). If Intermediate wave C ended at SPX 944 it would be considered somewhat of a failure since the typical fibonacci relationships between C and A waves suggest: at least 0.618 (SPX 967), 1.0 (SPX 1035) and even 1.618 (SPX 1145). At this point there is little evidence that this has occurred, and the market appears to be a normal pullback after an extreme overbought condition on both the hourly and daily charts. The pullback from the SPX 944 high is currently at the 61.8% retracement level. The market should find support around fridays SPX 888. The key level to watch for signs of a failure is the SPX 848 pivot. Should the SPX break significantly below this pivot, i.e. SPX 840, the upside momentum of the uptrend would have been broken.

SHORT TERM

Support for the SPX remains at 848 and then 789, with resistance at 912 and then 935. Short term momentum was overbought during the rally early in the week and is now displaying a positive divergence at friday’s lows. As noted above, the pivot at SPX 848 is an important support pivot for the uptrend. Should the market fail to hold this pivot (SPX 840) in the days and weeks ahead the uptrend is likely over. The next few days will be important for the rest of the month. Also, keep an eye on the financial sector XLF. It has been displaying some weakness since mid-December. This week is also an options expiration week, and yearend earnings should soon start being reported. While the market has remained relatively quiet for the past few weeks it is unlikely to remain that way in the coming weeks ahead.

NEXT WEEK

This is certainly one of those busy weeks. On tuesday the twin Deficits trade and budget will be reported. On wednesday retail Sales and Inventories. On thursday the weekly Unemployment claims along with the PPI, Philly FED and the Empire index. Then friday the CPI, Industrial production, a Consumer sentiment reading and Options expiration. The FED is also in the mix starting monday with a speech from FED chairman Bernanke from the UK. Then at 2:00 on tuesday, the Beige book is released. Usually another market moving event. Best to your week and in 2009. You may skip the following section as it is certainly not technical analysis.

CHARTS: http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1606987

COMMENTARY:

Despite the FED, Treasury and Government injecting unprecedented sums of monetary stimulus into the private and public sectors, the market has rallied only 27% off its November 2008 lows. After reviewing the $775 bln Obama-Biden economic stimulus plan, released this morning:http://change.gov/agenda/economy_agenda/. Which will likely run into substantial opposition in the House and Senate, until the votes needed to pass a modified version of the plan are bought with “pork barrel politics”, (http://en.wikipedia.org/wiki/Pork_barrel). It is clear that even this new administration is missing the mark for what is needed in our imploding economy: the restoration of confidence in the US government and its financial system. Until one or the other begins to take even a modicum of responsibility for what has transpired during the past decade or so, investors will remain on the sidelines. The stock market and all other markets will continue to remain predominently in the hands of traders. A consumer driven economy, (70% of GDP), can not recover from a negative economic shock unless consumers know they have a place to live, a place to work, food on their family’s table, and a safe place to store/invest their excess capital. Some measures have been taken in this regard, but they have been simply not enough. Borrowing from the future, to cushion the fallout in the present, is exactly what was done in the past. A country has only so much capital. It is not infinite. The steps needed to move forward are first to admit specific mistakes were made, rectify those mistakes by reinstating/repealing laws that led to the problems, prosecute those that lobbyed for and then blatantly abused the mechanisms set in place for purely personal gains, force the US banking sector to establish new management teams in the operation of the nations largest banks, and overhaul FNM/FRE with a new management team so these agencies can requalify and refinance all troubled mortgages for only owner/occupied homes. This, in my opinion, would start the pendulum of economic momentum and confidence in government/finance moving in the right direction. Until some, or all, of these concepts are put in place, the economy will continue to implode upon itself as distrust and fear expands, spreading into the rest of the segments of the economy.