Channels and Canals??
You are probably wondering what the heck this article is about referring to channels and canals. This article will first describe this comparison, and present an extensive inter-market analysis. The ending conclusions of the article will tie all points together, with future implications.
Channels and Canals
A channel is defined in the dictionary as "A strait or narrow sea between two close land-masses". The banks of the channel guide the water "flowing through it in a defined path. This is a natural occurrence in nature. A canal is defined as "An artificial waterway or artificially improved river used for travel, shipping, or irrigation". This is an artificial path carved through land to save time from traveling. The most well known canal system in the world is the Panama canal. The construction of this saves time for ships crossing over between the Atlantic and Pacific rather than having to take a long journey around South America to Terra Del Fuego, and up the other side of the coast.
Stock market analysis often uses channeling to aid in determination of when impulses, zigzags, flats and triangles have completed their pattern of a certain degree. These lines are called "channels". Their function is similar to that of the definition mentioned above, except in this instance the wave patterns naturally move within the channel. The North American stock markets have been in a downtrend since 2000 as shown with channels. The stock market is no where near bottoming any time soon as the wave pattern and channeling suggest. The bottom of the DOW lies between 3-4000. The market will slowly move down in a natural pattern and find a base from where the next bull market can begin.........enter the Fed.
The Federal Reserve has caused the US greenback a loss of 95% of its original value since they came into existence in 1913. The last 20 years of currency expansion created one of the strongest bull markets in history, and is now being held responsible for holding the savings and real estate of this current generation on the hook. The US government's strong dollar policy only aided to make the coming economic crisis worse than it could have been. A strong US dollar created a US consumer base that imported more than they exported. In fact, most Asian countries relied on this for boosting their own employment statistics. This triggered a stock market boom, and a real estate boom, which is starting to crack at the seams as this is typed. A real estate boom caused real estate values to rise which in turn allowed people the ability to refinance their home to support their good life. Now that companies are laying of, manufacturing numbers slipping, jobs evaporating, people are having trouble to pay this debt down which creates a lot of property and items owned by the banks. Credit is currently causing anything associated with it to have deflationary properties. Deflation is a real problem right now in the US. The FED cannot print money fast enough to match the amount leaving the system from bankruptcies, trade imbalances, etc. This equates to a market channel that will contain a downward movement that will take 2-3 years to resolve.
The author believes the FED is trying to rapidly carve a canal to improve the market conditions and speed up a recovery. The FED is tinkering with interest rates, which do not have much room to fall, printing large amounts of fiat to trigger inflation, supporting the market, and suppressing gold prices. The FED is trying to make a canal to carry the market across a flat section until things look better. In the current market environment, this sort of canal building is like trying to put one through the middle of a minefield. Some mines may be missed, or ALMOST get detonated, but sooner or later, one will go off and have severe repercussions for those in its path. The markets function in a very balanced system of a high degree of complexity. Having some people roll dice and hope that adjusting this knob, and tweeking the PID (engineers will know what I mean by this) will help. When a system is running at a high level of complexity with alterations that can occur in a split second, no human will ever be able to respond fast enough. The canal that has been formed with market intervention has a floor as seen on the longer term S&P 500 chart., with a descending triangle pattern above. This rally could extend until mid-May, but at that point I believe that the carving of the canal will hit a land-mine, and send the markets down even harder with sever implications to follow.
Intermarket Elliott Wave Analysis
The next section will examine Elliott Wave analysis of the XOI (Oil Index), HUI (Gold BUGS Index), USD index (US dollar Index), and the S&P 500 Index with longer term and shorter term charts. The longer term charts attempt to define the longer trend of the indices, and the short term charts try to define current market movements in relation to how things fit into the larger picture. Elliott Wave analysis measures greed/fear, which is shown in the wave patterns. Elliott wave analysis is a pool of standard market analytical techniques rolled up into a much more complex form which allows actual quantification of market rises, corrections etc. All of the indices have their own patterns, but will somehow have some influence on the evolution of the others wave pattern. Each chart has internal commentaries for a more accurate description of the Elliott counts presented.
Elliott Wave Analysis of the XOI
The first chart shows the XOI on a long-term scale. The XOI has been in a correction since 1998. The analysis shows we are in the final stretch of reaching a bottom in the entire corrective move, prior to a very strong advance. The move up in wave III should carry the index to a minimal value of 700-750 within the next 5 years.
The second chart shows the XOI on a shorter-term scale. Wave B of (5) has just started, and should carry the index down to 390-400 conservatively. The pattern could drop to as low as 370, pending how the wave structure develops.
Elliott Wave Analysis of the HUI
The first chart shows the HUI on a long-term scale. The move up from October 2001 has been an upward trend. The circled yellow line on the chart is an elongated flat, which usually are found in triangular structures. The wave (4) or [X] currently forming has an ascending triangle structure thus far. Wave D currently underway should be a three wave corrective structure (currently in wave [a]). Deflation is currently an issue, which could plunge the value of gold. However, this is not seen in the wave pattern thus far. Whether or not this triangle is wave (4) or [X] has implications on the degree of advancement the index makes. If wave (4) develops, then the upside is to 190, based on the length of the longest wave of the triangle (+/- 25%). If wave [X] develops, the upside is unlimited. But the near term target would be for 250 on the HUI.
The second chart show the HUI on a shorter-term scale. The HUI has impressively had an impulsive structure develop since its supposed completion of wave C. The red channel depicts wave [y] of C. The larger yellow channel illustrates a potential bearish count that did exist. Notice the green circle showing how an impulsive wave cleanly broke this channel, further support for the larger degree count being accurate. A move below 116 would be bearish according to the current chart.
Elliott Wave Analysis of the US Dollar Index
The first chart shows the USD index on a long-term scale. The current wave structure going down has been altered slightly since the Inter-market Analysis Article from last month. The wave down suggests the USD will be heading significantly lower. The current wave (2) or (B) forming has two possibilities, the green line showing the preferred market direction path, and the gray line showing the alternate. Both suggest we go sideways for a while longer before resuming the downward trend. The USD should bottom between 80-85 in the next 3-5 years.
The second chart shows the USD index on a shorter-term scale. The pattern has several alternate counts, which is further suggestive of the current pattern staying at current levels until possibly early to mid-May. The preferred count is a triangular structure developing. A move below 99 would rule out this count, with a move down to 98ish before heading back up in the final leg of the pattern.
Elliott Wave Analysis of the S&P 500 Index
The first chart shows the S&P index on a long-term scale. The black line shown is the longer-term down-trend line. Wave [X] has been developing a descending triangle since July 24, 2002. Further sideways motion could bring the pattern to an intersection of the triangles upper trend-line and the longer-term downtrend line. Completion of the current wave (E) is thought to be complete in early to mid-May.
The second chart shows the S&P index on a shorter-term scale. There are several alternate counts, which is suggestive of the current pattern remaining near current levels for a while longer than anticipated. The preferred count shown has a triangular structure forming. A drop on the wave structure to below 845 would negate this possibility, and have a possible flat pattern develop. After we complete wave (E) the S&P should decline to 600-650. After, we could get a bounce, with further lows afterwards. This is speculation right now, but much lower lows lie in the not too distant future.
The central idea behind this editorial is that the FED is attempting to carve a canal in the market structure to artificially guide it until it reaches calmer waters and can set sail again on a new bull market. The next chart shows how the DOW correction from 1929-1932. R.N. Elliott labeled the move from 1929-1942 as a triangular structure. The move here completed wave (a) of a larger degree triangle ((a) through (e). Notice how smooth the market dropped relative to the S&P of today. Market intervention for maintaining ones interest is vividly displayed. In 1929, only 5% of the population were invested in stocks. We had 60-70% participation in 2002 through mutual funds, pension funds or direct ownership of stocks. The governments therefore have a greater interest in making sure people do not lose much money. Currently many pension funds are in dire straits, and a further loss of market capitalization could bankrupt many companies. Intervention does make sense to those higher up to prevent an outright system collapse. The companies reporting earnings are still lying, but the numbers get worse as each quarter passes. The wave patterns will pick up greed/fear, and even the behaviour of computer trading which currently accounts for 30-40% of daily trading on the NYSE. A derivative explosion is looming once people get on the wrong side of the market, and it will bring down the house of cards currently elevating the market. It is important to note that when and individual is trading gold and oil stocks they examine the appropriate stock indices, not the commodities they are based upon. The traders in commodities and stocks will have different mentalities and objectives. The HUI rising and XOI falling illustrate how different commodities can have different wave patterns, and should be treated as such. The HUI should keep moving up, and the XOI once it bottoms will advance, further adding fuel to gold and gold stocks advance. A shortfall in silver could be the Achilles heel that ends all the paper trading of the markets and actually allows the bull market in precious metals to get underway. The elastic has been pulled so hard in one direction, that the upward move will unintentionally have the opposite extreme.....which is up.