Market Letters Digest

By: David Petch | Tue, Sep 30, 2003
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Alternation Between Waves 2 and 4

I may have mentioned this in a prior issue, but am presenting the information to those who may have missed it. Alternation between waves 2 and 4 in an impulsive move (5 waves) are an essential requirement for aiding in determination if a wave pattern is indeed impulsive or not. Alternation when comparing waves of the same degree involve the following : a) Price (the distance covered in vertical units). b) Time (the distance covered in horizontal units). c) Severity (The percentage retracement of preceding waves).

d) Intricacy (the number of subdivisions present in a pattern). e) Construction (one pattern may be a flat, the other a zigzag etc). The more of these alternations present, the greater the probability of an impulsive count.

What else to write about? The charts really consumed a lot of my time, so writings in this portion are brief. Mutual funds are doing some window dressing right now, selling the past month and now to make the year end sales figures and percent returns look good. The battle of the currencies is still going on. The tennis game of devaluation, then price spikes etc can only go on for so long. The price of gold stands not only to rise based upon currency expansion, but also from people hoarding. The gold hitting the market is being quietly absorbed, and as more people hoard, the less the supplies will grow. The eastern countries and middle East are the main people mopping up the gold while North American continues its current monetary expansion. We are at a unique position globally, because most countries are linked via currencies and trading. During a deflationary period, most assets fall including gold, as money is used to buy things. If so much money exists, and all curencies are unstable, one has to but wonder why gold would not be the substance of choice to own. None the less, the current bull market will face most fierce resistance during the intial stages, as hedges and derivatives can be cleared. Fundamental analysis is important for picking what sectors and areas are going to do well, while technical analysis tells one how to get in at the low and sell near the top.

US Dollar Index

The first figure shows the USD index in a weekly chart with Bollinger bands (BB) and stochastics. The upper BB's still have a ways to go prior to completion of the ribbon pattern. The lower BB's still are in a bearish setup, indicative of further downside to this index. Stochastics are also pointing lower. Figure 2 shows the daily USD index with BB's and stochastics. The lower 21 moving average (MA) BB went below the price index, signifying an upward correction is underway, with a move up to 95 to 96 possibly, prior to continuation of the downward trend. Full stochastics at 55,13,25 should have 1 ½ to 2 more months' downside prior to a significant upturn as indicated by the wide gap between %K and %D. I had some people comment on the last call of the USD going sideways until December. When I took 1-½ weeks off, the pattern rolled over significantly harder than anticipated. A 1-2 week upward in the USD could correlate with a 1-2 week further correction in gold's and the HUI. Figure 3 shows MA and MACD. The 50 and 200 day MA are well above the USD index price right now, and the MACD is bearish. A retest and breach of the June low is expected in the coming months.

Figure 1. USD Index with Bollinger Bands and Stochastics

Figure 2. Daily USD Index with Bollinger Bands and Stochastics

Figure 3. Daily USD Index with Moving Averages and MACD

Figure 4 illustrates the longer term Elliott wave counts. The wave pattern since February 2002 is coming nearer to completion at the cycle degree. As shown on the shorter term Elliott wave count of the current decline, the pattern is rather messy right now and will probably need to be relabeled somewhat. The important thing is to gauge the decline with other indicators so one can tell how nearer we is to the bottom so the correct degree of labeling can be applied to the pattern. The third wave was extended in time, and complexity in relation to the first and fifth waves of primary degree ([1], [3] and [5]). Waves [2] and [4] had nice alternations. Figure 5 shows the shorter term Elliott wave pattern of the USD index. This pattern is difficult to count. The labeling will probably require modification upon the way down, but for now, this is the best labeling scheme based upon the presented pattern. There is an unfilled gap shown in shaded green, which could get filled as wave (4) nears completion (unless it is a runaway gap). Best to follow the queue the stochastics and BB's are presenting, suggestive of 1 ½ to 2 month of downside movement in the USD index prior to a turnaround. The longer term Elliott wave count of the USD index is more accurate since it is of a larger degree count.

Figure 4. Longer term Elliott Wave Count of the USD Index

Figure 5. Shorter term Elliott wave Count of the USD Index

Gold BUGS Index (HUI)

The weekly pattern for the HUI is shown in Figure 6 with BB's and full stochastics. We have to be careful at this juncture as a break to the upside or downside could occur. Observe the circled portion highlighting the 34 and 55 MA lines coming together. Not that history will repeat itself, but a convergence of the lines could signal a top. We have had a three-year uptrend and I am expecting a significant pullback as described in last week's issue after we have one more leg up. Multiple time frames and indicators should be observed for confirmation of an absolute top. Figure 7 shows the daily HUI with BB's and full stochastics. Last week I reset the full stochastics to a longer time frame to remove any false signals. The full stochastics will issue a near 100% accurate sell signal now when the %K and %D lines cross (and should not be ignored). The space between the two lines is still sloping upwards right now, so there is no sell signal. Examine the circled areas 1, 2, and 3. One thing to note is that the upper 55 MA BB is above the other two BB's in area 3. Does this mean a top is in place, or do we get a continuation of the trend?? When a top is in, we should get a curling of the 21 MA BB going sideways as shown in 1 and 2. A merging with the lower 34 MA BB confirms a sell signal (if the stochastics are set to cross over or have done so already). These are my two favourite indicators for helping to gauge the wave patterns. If this is a top watch for the wave pattern to touch the lower 21 MA BB and bounce back to kiss the upper 21 MA BB prior to selling. Moving averages and MAD are shown in Figure 8. The 50-day MA is still well above the 200 day MA. See the Elliott wave pattern section for possible levels that could be hit. The MACD is set at 5,34,5 and is a very accurate setting for when a reversal at a major trend change occurs. When the faster moving line crosses under the slower moving line, look out. I prefer to wait for a major trend change in the wave pattern, due to the smaller waves taking one out of the markets during continuations of the trend.

Figure 6. Weekly HUI Index with Bollinger Bands and Full Stochastics

Figure 7. Daily HUI Index with Bollinger Bands and Full Stochastics

Figure 8. Daily HUI Index with Moving Averages and MACD

Figure 9 shows the longer terms Elliott Wave count of the HUI. Currently the HUI has been in an uptrend for the past three years. A top of this entire wave formation is expected after one more final leg of the current pattern. Other indicators but have not yet confirmed the alternate count (shown in gray) shows a possibility of the pattern being complete. Waves 2 and 4 have alternation with the current scheme. Wave 2 did not drop much, so wave 4 should retrace a good portion of wave 3. This correction could take another 2 to 3 weeks to complete. The possible Fib retracements of wave 3 are shown on the right hand side of the chart. The current position in this analysis is in standby, waiting for a signal confirming a continuation of the trend, or a reversal. Waves (3) and 5) are nearly identical in price length, which bothers me since one wave will usually extend 161.8% in a strong uptrend. Corrective patterns are difficult to decipher as to what will occur so I have drawn in the possible retracements and should be viewed as such (in the realm of probabilities). We could have a shallow retracement of wave 3 or it could be down to the shown Fib levels. Failure to correct down to at least the 38.2% level would indicate the strength of the larger degree trend. The next few weeks will require daily monitoring of patterns etc. to ensure the market does not unnecessarily whipsaw one out of market positions or warrants exiting. As an example, CDE is nearly done, while patterns of mid-tiers such as GoldCorp etc are bullish. Figure 10 shows the shorter term Elliott wave count of the HUI. As mentioned before, the absolute future movement of the HUI is uncertain (up or down). The wave 4 labels as a flat, which theoretically means the pattern is complete or nearing completion. This could also be one portion of the correction, which is impossible to discern right now until it occurs. I would expect a drop to 180 for a minimum Fib retracement, but it does not have to occur. The flat pattern mentioned last week had a strong [b] wave and a [c] wave retrace it entirely, illustrating a fight occurring between the bulls and the bears of gold and gold stocks. The next two weeks should offer confirmation of the actual top. When we do get the larger degree correction, it should be steep. To profitably maximize returns on this move, confirmation from the longer-term oscillators should be followed, which have yet to issue a sell signal.

Figure 9. Longer term Elliott Wave count of the Gold BUGS Index (HUI)

Figure 10. Shorter term Elliott Wave count of the Gold Bugs Index (HUI)

S&P 500 Index

Figure 11 shows the weekly S&P chart with BB's and full stochastics. The lower BB's (34 and 55) are both around 800, which is the current target for the low of the next wave. The next move should be down to 950-960 prior to significant resistance. The full stochastics have a long way prior to curling over (4-6 months), so I think we have one more leg up after the coming decline into 2004. Figure 12 shows the daily S&P chart with BB's and full stochastics. The wave structure from March 2003 finally broke down, and we are beginning our decline to 790-830. The BB's are getting set for a decline 2-3 weeks away once the S&P moves into lower territory. The area of 950-960 has a lot of resistance. A break of this area implies a continuation of the decline towards 800, lasting 3-4 months (Januaryish 2004). Longer-term exact turning points are hard to call, but the trend is down. Figure13 shows the daily HUI with MA's and BB's. The S&P is sitting just above its 50-day MA right now. The 200 MA is sitting at 930. In all the S&P charts so far, a lot of resistance is in the 930-950 area. The MACD has been trending higher, but it looks like a decline is underway. The liquidity shot into the economy looks like the residency time could be up to one more year, keeping the stock market afloat.

Figure 11. Weekly S&P 500 chart with Bollinger Bands and Full Stochastics

Figure 12. Daily S&P 500 chart with Bollinger Bands and Full Stochastics

Figure 13. Daily S&P 500 chart with MA's and MACD

The longer term Elliott wave chart is shown in Figure 14. The current structure thought to be finished recently was a running flat, making up leg [A] of a larger degree correction or wave (A) of a triangular structure. Running flats (elongated) are often found in triangles, so this could be possibility (something to watch for). Based upon the weekly BB's and stochastics, there is a high probability of a large move in the markets after we finish the current decline around late December to early January 2004. Refer to the shorter terms Elliott Wave count of the current decline. It is though the move down will be a zigzag to around 790-830. It is possible we go much lower, but based upon the indicators, the majority of the evidence points to this pattern unfolding as described above. Taking long positions in the market is not recommended, due to the coming slump the markets will be in. Figure 15 shows the shorter term Elliott Wave count of the S&P 500 index. The decline in the pattern to below 1018 confirmed the pattern from March 2003 terminated. The current assumption is that a zigzag or complex correction is going to be occurring during the next 3 to 4 months. Wave (v) yet to appear should place a low around 1080-1085 if it is of similar length to wave (i). Wave (iii) could have terminated higher, but placing at the current position has it as the extended wave, which fits better. The time frames here are very small with the lowest degree being shown as sub-minuette. There is a greater chance of being whipsawed with counts at this degree of labeling. The move to 1080ish will complete wave [i] with wave [ii] having the chance to retrace up to 1005 to 1015. The degree of the counts may have to be raised later, but will only be done when absolutely necessary.

Figure 14. Longer term Elliott wave count of the S&P 500 Index

Figure 15. Shorter term Elliott wave count of the S&P 500 Index

Lots of charts this week, hopefully to show the longer term of all three indices. Oil, and the natural gas indices will be shown next week (these ones too, but fewer charts).


 

David Petch

Author: David Petch

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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