Tony Caldaro is an Elliot Wave analyst who maintains a great blog, “The Elliot Wave Lives On” about the stock market. Here is part of his weekend post:

During the strongest (+289 SPX points), longest (3 months) and best performing (+43%) uptrend of this entire bear market. We heard a lot of media noise about “green shoots”, the economy has turned around, and the recession is over. While following all the economic data on a daily basis even before this downturn began. One can agree with the media in one regard. It no longer looks like a recession is underway. It looks more like a depression. International trade has fallen off a cliff. Banks are failing nearly every week. Real unemployment is between 16% and 20%, and some of those that are employed are having their hours cut back and/or taking pay cuts. Housing prices, in some areas, have fallen over 50%. The eight largest economy in the world, California, started the month by issuing over $300mln in IOU’s. On top of all this, States have been raising fees and taxes to increase revenue. Also there is word that the government has something similar in the planning stages. Last but not least, the mega banks, which have been the major recipients of cash infusions, asset swaps and loan guarantees, have been building excess cash reserves to astronomical levels. Historically excess cash reserves have been about $20bln, currently they are over $800bln. Either the banks have a lot more bad assets than are being reported, and/or the economy is a lot worse than most expect. Dark clouds are still coming over the horizon.

Technically, the stock market continues to look vulnerable to downside surprises. From the Oct 07 bull market high at SPX 1576, to the Mar 09 low at SPX 667, we counted a zigzag (5-3-5) Primary wave A. This was defined by three Major waves: Major A Mar 08 (SPX 1257), Major B May 08 (SPX 1440) and Major C Mar 09 (SPX 667). A few days after the low we anticipated the start of Primary wave B. For three months (Mar- Jun) it had been underway as the SPX rallied to 956, for a 43% gain. This was a bit short of the typical 50% gain often associated with Primary B waves. Nevertheless, nearing the high we counted a completed zigzag pattern and warned of a potential top. Over the past two weeks the major indices SPX/DOW/NDX/NAZ all confirmed new downtrends, affirming that completed pattern. Now that Primary wave B has completed, and Primary wave C is underway we see two potential scenarios unfolding over the next many months. The first would be a five wave pattern down to the Mar 09 lows at SPX 667, to complete an elongated flat. The second would be another extended zigzag pattern breaking through that low and bottoming in 2010 in the neighborhood of SPX 400. It is too early to tell which scenario will unfold. But this remains a treacherous stock market.