This issue is briefer than the past few due to summer time and the outdoor projects involved. One form of analysis examined are Bollinger Bands. Often when studied alone on a shorter-term basis, they aid in determining when stocks are overbought, or oversold with a correction to take place. Often the BB's will ride the ascent or decline making a reading on the pattern difficult. Using three BB's with Fibonacci numbers at 21, 34 and 55 for daily and weekly candles allows for an easy determination of the trend.
The markets have become a 10,000 piece jigsaw puzzle lately, often seeming like a few pieces are missing. We have the FED injecting huge amounts of liquidity into the markets, and this is having a strong impact on the markets and the current economic scenario. Interest rates being so low have caused more people to enter into bonds due to shorter term interest rates drying up. The FED cannot really lower rates much more, as this would have dire consequences for money market funds. A lot of seniors relying on income derived from bonds and short term treasuries are finding themselves at a point where they cannot live off of the interest. The FED is shaking the tree to try and get people to invest their money into the market, housing etc. Playing this game is a house of cards. The money is going into the markets and housing creating intervention that has a lot of indicators not functioning the way they should be functioning. With the wave pattern, it is extending the pattern out much further prior to a bottom. The important thing is to feel the pulse of the market to know what kind of shape it is in. So far, I must say I did not expect the height of the rally we had, but studying the wave pattern and other indicators is pointing to a strong 2004 market rally, after we get a correction from late August till Decemberish of this year.
With the above information, it makes playing the gold rally possibly more profitable. The charts below show the USD is in a very bearish state, and lower lows are coming which will drive gold up higher. When a bottom is in place later on this year, a significant rally will occur, which will give a significant retracment to gold and gold shares. A very profitable trade does exist, and gold, and gold shares are firing on all cylinders until at least the end of the year. After, a correction and consolidation will take place prior to the next leg up in the gold bull market. All of this increased liquidity is classically inflationary, but we do have deflation in items tied to credit, both occurring at the same time. After we do get the Presidential rally, this is when we can expect the markets to tank, and the liquidity to chase the next horse, which will be gold. I would expect the really strong move in gold will occur in later 2004-2006 based on the above, but food for thought now. Things can turn on a dime, and the market analysis presented is based upon what the charts are showing now.
Elliott Wave analysis allows quantification of a wave pattern for letting one know where they are in a bull or bear market. It is important to rely on other indicators/oscillators to add to the accuracy of a wave pattern. When I initially started out using Elliott, I failed to do so and it was costly on a few trades. Using other oscillators or indicators in a slightly more complex or time consuming analysis can provide information others may miss.
Due to time, analysis has been limited to the US dollar index, HUI and S&P 500.
Two charts below show the current US dollar patterns. More downside is anticipated prior to a turnaround.
Gold BUGS Index (HUI)
The move last week above 154 invalidated the ascending triangle, leaving two possibilities as shown in the first chart below. The preferred and alternate count both point to a longer term topping of 250-300 prior to a substantial retracement. The second chart shows the internal wave count of the most current wave up. We should see a retracement prior to heading higher. People holding long have little to worry, as things can turn on a dime, giving the correction a different pattern.
Three charts are shown below. The first chart is an Elliott Wave count of the current wave pattern. The second and third charts are the S&P with weekly and daily bars, with Bollinger Bands set to 21,34, and 55. Notice how the daily pattern has turned bullish, while the weekly is showing a consolidation. I am uncertain how this reads. The daily indicates a significant reversal, but the weekly shows one more leg down prior to an uptrend. Watch how this develops carefully.
That is all the analysis for this issue. Other indicators will be examined in future issues with a different twist to try and spot trends ahead of the crowd.