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July 07, 2003

Market Letters Digest
by David Petch

Introduction

The analysis this week is broad, so commentary has not been included on the markets and news. The US dollar Index (DX00Y), Gold BUGS Index (HUI), S&P 500 Index, Oil Index (XOI), and Natural Gas Index (XNG) will be examined, with more emphasis place on that latter two, due to no coverage during the past month.

When using oscillators, it is important to examine daily and weekly patterns. Weekly oscillators will stay oversold or overbought for the majority of the bull or bearish phase. Usually the stochastic moving averages will have a negative divergence with the index and provide 1-2 years of a hint that the market is slowly topping out. Red lines on the charts indicate market bottoms and the green lines indicate market tops. Charts with oscillators also have Bollinger bands set at 21 (red), 34 (blue), and 55 (green). The markets tend to move in a pattern based upon Fibonacci numbers and ratios. This setting is based upon this knowledge.

Elliott Wave charts presented have the preferred count shown in colour, with the alternate shown in grey.

There are some very interesting developments in the patterns this past week, particularly the commodities. A total of thirteen charts are present, so there is some information to digest. The summary at the end of the article will provide the bare bones as to the market trends.

US Dollar Index

The first chart shows the daily stochastics with a setting of 55,21,34. Whenever a major market move down has occurred (as shown with the %K and %D lines crossing), the Bollinger bands (BB) will all converge and to sideways first prior to the next leg down. The stochastics have a triangular channel developing, indicating downward pressure from the market. The %K (faster moving MA) just crossed over the %D (slower MA), suggesting the US dollar will be in a sideways to upward move for the next 2-4 months, pending how market momentum develops during the rest of the summer. The BB's also suggest a 2-4 month consolidation period prior to heading down. Unless major bad news occurs, I expect a neutral summer for the US dollar index.

The second chart shows the Elliott wave pattern of the USD currently. The labeling from last week is unchanged, just going into wave c.(a)or(w). As seen on the chart, we have a ways to go yet. Due to the larger degree labeling, now wave 4's are in this area, so it is highly unlikely any larger degree triangular structure will develop. We should have a resumption of the downtrend early this week, with an expected low of 93 to 93.5. People will be expecting the US dollar index to be going to hell in a hand basket………not yet according to the charts.

Gold BUGS Index (HUI)

This is one of those interesting patterns that have been developing that will be touched upon briefly here. The first chart shows the daily BB's and stochastics (setting of 89,21,55). The BB's are still very bullish, and the stochastics show that we have 3-4 months (maybe longer) until gold stocks pull back. Still a buy here.

The second chart shows the Elliott wave pattern of the current leg up in the HUI since the end of March. Last week I commented on two possible alternate counts involving a running triangle. I would have expected a minimum of a 50% retracement of wave D and a 61.8% correlation to wave C. The move down stopped abruptly at 145 and went up to 155ish, placing the entire move up still in the upward channel. This indicates the pattern is still in the same degree and we are in wave v.1 right now with a correction coming up here soon or the alternate count is we are in wave D. The running triangle scenarios still could come into effect, just the wave pattern has yet to have termination of its pattern confirmed by post market action.

S&P 500 Index

The first chart shows the daily pattern with upper BB's getting set to go sideways, and the stochastics (set at 55,13,21) with the %K and %D crossed over. This is bearish, and we should have a move down here in July with a move up in August to early September. Last week the weekly chart showed the stochastics had crossed over. This could roll over, and things could have the index move lower…..food for thought. The XOI in its downward trend had the BB's follow a move up, only to have a hard drop 3-4 months after…..more food for thought. With the markets moving on a dime, focusing on the short term and longer term trends are imperative for attempting to deduce what will happen with all angles covered so most trades are kept profitable.

The send chart is an Elliott wave pattern, focusing on the decline since the middle of June. The preferred and alternate counts both have equal probabilities with the same conclusion…..the markets are to be heading lower this week (surprise surprise). How the wave pattern develops this week will determine which count comes into effect. X waves usually retrace moves 61.8% or 161.8% and in the chart shown, wave (x) retraces wave (w) precisely by 61.8%. This Fibonacci ratio determined the choice of alternate versus preferred.

Oil Index (XOI)

The Oil Index has not been updated in the last month so four charts are presented here. The first chart shows the weekly XOI pattern. The second chart shows the daily XOI pattern. Both present BB's and stochastics (set at 55,21,34). The weekly pattern has the stochastics %K and %D cross over which is very bullish on the longer term. The BB's show a consolidation is in order here (4-6 months is my guess). The daily stochastics show a cross over of %K and %D which is bearish for the short term. Shorting the XOI index is a relatively safe bet. The BB's on the daily rode the move up which is potentially bullish. The Elliott wave patterns present the possible wave pattern developments.

The next two charts show a longer term and shorter term Elliott wave analysis of the XOI. The longer-term chart shows the preferred pattern just starting the start of a bull market in the oil stocks. The retracements shown on the right should not have the index drop below 455. If a move below 440 occurs, then it can be assumed the alternate count is correct. The alternate count has completion of wave (4), with wave (5) to follow. If this were to occur, then a drop to 400 would be expected. The shorter-term count shows the corrective wave down thus far. The wave w is a zigzag, with wave x currently developing. The next leg down should also be a zigzag, retracing down to 455-460. The pattern can also be labeled as an impulsive wave down….but the severity of the retracement will determine which count is correct. The XOI is bearish for the next 3-4 months minimum for longer-term traders.

Natural Gas Index (XNG)

The first chart shows the XNG weekly pattern and the second chart shows the daily pattern. Both charts show BB's and stochastics (set at 55,13,55) The weekly pattern shows that the bull market phase for the XNG is far far from over while the daily shows a shorter term correction is in order. Since the move up has been going on for nearly one year, we should expect a 3-5 month sideways action at this point.

The next chart shows the Elliott wave pattern of the XNG. The move up terminated last month as expected, and we are now entering the decline phase. People shorting may want to be careful, as a retracement of the move down is in order during the next 1-2 weeks.

Summary

What summer doldrums have brought us is a mixed bag….the S&P index down for the month of July, US dollar index going sideways, XOI and XNG in a corrective decline, with the only bright spot for the overall summer trading are gold and gold stocks. I anticipate gold may have a little breather later on, but the stochastics show that a top in the HUI is 4-6 months away. A lot of the sentiment indicators are not holding up right now, as are shorter term indicators etc.

The more and more I do Elliott Wave labeling, the more I realize the importance for having other indicators to gauge the expected length of time moves up or down will take. There are enough indicators and new stock programs to boggle the mind. One is best to become an expert in 6-8 indicators and use them rather than have 30-40. This only will cloud the mind.

Next week I hope to begin coverage of the 10 year bond, or short term treasuries. I have to first compare both to see which one will give a more accurate picture for longer term interest rates. Interest rates are the key for maintaining the market runs. Since there is heavy government intervention, alternate counts, and depths of corrections should be carefully considered. I see the S&P dropping to 820-840 by Christmas only to rally very hard next year (a move up I do not know, but 1100-1500 is possible, or the alternate is we drop down to 600ish by December to March 2004, and then rally up to 1000ish by November of 2004. Both patterns indicate a larger degree rally will occur, but again the depth of the correction is critical for accurately determining the wave pattern.

Most people assume Elliott wave analysis is voodoo and that every Elliottician will have a different count. Most counts if correct should have a similar design, with minor differences. Elliott Wave analysis attempts to quantify the market structure and anticipate the rise or fall of markets so that trading can be more profitable. That is the bottom line for everyone.

Have a good week and hope all the American readers had a great long weekend.

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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