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May 22, 2005

TNX Update
by David Petch

The patterns have clearly become bearish, with the TNX heading down for the next 2-4 weeks minimally. The short-term stochastics had the %K curl down beneath the %D. A reversal is 2-4 weeks away. The upper Bollinger bands are developing a ribbon formation, with the upper 55 MA BB still rising; when it starts to curl down, a bottom will be in or shortly be put in place. The lower Bollinger bands are declining, which should see the TNX reach the printed values in the next while.

Figure 1

The moving averages are still in a bullish alignment, but a bear cross is likely to occur in 1-2 months. There will likely be no strength in the TNX until this occurs. The full stochastics are on a longer term setting, with the %K well beneath the %D. A crossover to the upside is generally correlated with a change in the direction.

Figure 2

The weekly TNX is shown below. The Fibonacci time extensions are shown mid-way through the chart. The next time point is October 2006. The Fib retracements of the advance are shown on the right hand side. The 50% level has been a strong support level, so a break below signals a move to the 61.8% retracement level. The full stochastics are in a strong decline, with the oscillations generally taking two years (one year up, one year down). The TNX could decline into early 2006 if the current pattern is extrapolated.

Figure 3

The full Elliott Wave pattern since 2003 for the TNX is shown below. The Degree of labeling has wave CorY.(B)or(X) is place. The decline is a near perfect impulse, but will it develop into a zigzag or wave C all the way down to 30?? (I think a zigzag develops). It should be noted that wave C could form to complete wave Y.(X), but there is no certainty in this. The full stochastics and Bollinger bands will aid in determining a reversal in the current labeling scheme. An impulsive wave is nearing completion, so expect a 10% to 38.2% retracement of the decline before another leg down begins.

Figure 4

This basically translates into no one wanting to buy 10 Year T-bills, because they see inflation brewing for the short term. Why own longer-term bonds that pay equal to or less than short-term financial instruments. What this means is the US government will have to raise interest rates to attract foreign money to finance their deficits. Think of a balance in the US. On one side there is the real estate market that is an incredible bubble. On the other side there is the government issuance of bonds, T-bills etc. to finance their deficits. This is an incredible balancing act. What the FED must do is the following:

i) If the real estate side gets too heavy, further government debt must be issued to balance things out (more houses translates into more imports required for homes).
ii) If the government issues too much debt, the real estate market gets heavier with credit (more credit being thrown to chase the market).
iii) The housing market decreases a certain amount and the issuance of debt is reduced an according amount so things decline together, not tipping the scale.

I believe point iii) is what we are witnessing. There will be a controlled rate of decline in debt, which will lead to a gradual reduction in the US real estate bubble. Real estate will decline before it has an absolute crash (2008 is my target), because if the housing market goes, then the recession in the US will be hit very hard. Auto production in the US is declining and plants are shutting down, but China and India, each country is putting 2 million vehicles on the road each year. North Americans make way too much to make cars and send them abroad, so they simply are closing down shop in places that are not profitable. Even though the US is slowing down, China and India are growing fast. They are starting the credit card boom, I think the Captain put last year only 22% of Chinese had credit cards. Asia is parabolically growing their economies. They will industrialize in a fraction of the time it took the US to do.

We are off the gold standard, so this allows money to grow infinitely without being hitched to a standard. Even though debt is ultimately deflationary, the immediate effect is inflation, so do not mix up the aftermath with the present. Energy is getting tighter and tighter; once people in China have a fridge they are not likely going to want to give it up (would you?). China is printing to grow their economy and the US must do so to secure energy reserves and allow their credit to expand.

Before the US raises interest rates, I believe they are going to allow their currency to decline to 72. Oil prices will rise, as will gold. This will put a hit on all aspects of the global economy, but it will make the US a cheaper place to do business. At this point, Europe will be bleeding and many global forces will force China to revalue their currency (or no oil etc.). China has the Remimbi pegged to the US dollar, so how ever much the US dollar declines, China still carries the same competitive advantage. Get out of Walmart stock while one has the chance, because the revaluation will translate into a 30-40% decline in their revenue.

This is why more time is needed (late 2006) before gold is really going to have a big move ($1200-2000/ounce, not including an expected move to $500-600 expected in the next year). Whether wave III in the HUI begins soon or simply a complex running correction with wave II finishing at a level well above the high of wave I in late 2006 remains to be seen. There is no way of knowing until 8-10 months from now, but I would not want to be left out of the coming base/bottoming period the HUI is putting in. Much of the above process takes time and the following must occur before gold is going anywhere. Resource stocks are going to go higher, because their simply is going to be not enough energy to go around and the large producers are going to have to buy out the smaller ones to keep their oil reserves up.

Deflation to follow, but the monetary expansion will continue. I read hedge funds are going to liquidate positions, which may spill into the market. The number of people shorting stocks is high, so this will buffer any decline and short-squeeze the market higher. P.S. The gold stocks are now basing and the indicators used as above are accurate at pinpointing the near bottom.

Frame Shift Analysis Applications in Elliott Wave

If anyone knows basic biology, DNA sequences are the code for making all proteins, RNA and tRNA in the body. Each unit consists of 3 bases, T, A, C and G and are called codons. A sequence such as ACTGAGGACATADGGATAGATACAGT (ok I added GATA as a joke) can be read as ACT- GAG-GAC-ATA etc.. However, If one starts reading one base pair over to C, then the reading frame is CTG-AGG-ACA-TAD etc. A protein will be read in only one correct reading frame, however, genetic engineering sometimes has inserted DNA vectors in the wrong reading frame. Try applying this to reading Elliott Wave patterns. If a complex wave structure has :3’s and 5’s in an incohesive pattern, try starting the reading frame of the pattern from another position and look for 5-3-5, 3-3-5, 3-3-3, 3-3-3-3-3 etc. The patterns should align into an Elliott Wave count that fits well.

For those wishing to view accurate market analysis as above using the above type of analysis on the AMEX Gold BUGS Index, AMEX Oil Index, US Dollar Index and S&P Index, check us out at www.treausurechests.com

David Petch
TreasureChests.info

Treasure Chests is a market timing service specializing in value based position trading in the precious metals and equity markets, with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven to be very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested discovering more about how the strategies described above can enhance your wealth; please visit our web site at http://www.treasurechests.info.

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