Market Letters Digest

By: David Petch | Sat, Aug 9, 2003
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After a little break, extensive analysis on the US dollar Index, Gold BUGS Index (HUI) and S&P 500 Index. The two chart types present include

1) Daily and weekly charts showing Bollinger band (BB) patterns and full stochastics with settings gauged to each index.

2) Elliott Wave analysis of shorter term and longer term counts.

As time goes on, the news gets worse; some good spurts come out. The government figures are hard to believe, so I do not pay any attention to them. The stock market will catch all the chatter and provide a better direction for the market trend than CNBC with all the talking heads flipping coins to state how they feel things will go.

Bollinger bands on all charts are 21 (red), 34 (blue), and 55 (green). Red lines drawn in mark market bottoms. Green lines drawn mark market tops.

US Dollar Index

The first two charts show the weekly and daily US dollar Index with BBs and full stochastics (55,21,34 setting). Figure 1 shows the upper BB's are far apart and will only come together when the downleg is complete.....This is two to three years away. The stochastics bottomed and are set to cross over; suggesting a USD rally is looming pending the coming correction down. Weekly stochastics can stay oversold or overbought for years. Notice the negative divergence the weekly stochastics had with the USD rise. Figure 2 shows the buy and sell signals generated by the stochastics. The rapid rise in the USD coupled to the downward slanting lines thrown onto the stochastics is strongly suggestive of one final downleg to the USD prior to a significant rise. Stochastics and BB's suggest one to two more months of sideways consolidation prior to one last downleg. A lot or resistance is at 90 cents......which is likely where it will bottom.

Figure 1 Weekly USD Chart

Figure 2 Daily USD Chart

The next two charts show the longer term (Figure 3) and shorter term (Figure 4) Elliott Wave counts. The upper trendline shown in black on Figure 3 shows the older trendline that was broken. The next wave down, wave [5]. I or [5].a, the bottom is expected to be around the 90ih level. There is significantly strong Fibonacci support at this region. A significant bounce is anticipated after this bottom, lasting 8-12 months in duration. If things do get very bad for the USD, then a zigzag could develop with a shallow wave b retracement lasting 3-6 months. Figure 4 shows organization of the USD move since May 18, 2003. The preferred count is a triple combination is forming with the final pattern being a triangular pattern (brown line). Alternate counts 1 and 2 are either the zigzag shown as part of a larger degree triangular structure, or all portions are individual components of a triangle. The individual wave components were restructured on their internal counts and ratios to have a flat-x-zigzag currently. Regardless, the USD has 1-2 months left in its trading range.

Figure 3 Longer Term Elliott Wave Count of USD Index

Figure 4 Shorter Term Elliott Wave Count of USD Index

AMEX Gold BUGS Index (HUI)

The first two charts show the weekly (Figure 4) and daily (Figure 5) HUI with BB's and full stochastics (89,21,55 setting). Figure 4 shows the BB pattern getting set to have another leg up (upper BB's hugging the price movement with the lower forming a ribbon pattern). The full stochastics has been overbought for one year....but weekly data from indices can stay there for years. Notice the positive convergence with the stochastics having a sloping trend indicated with the red line. Figure 5 shows the upper BB's hugging the trend and the lower getting set to form another ribbon. When the upper three BB lines break apart, that is a sign that the trend will change for the shorter term. Red and green lines mark the market bottoms and tops based upon the stochastic line crossovers (%K (faster line) over %D (slower line)), respectively. Generally, a swing of the stochastic from bottom to top is around six months, which is around November to December. The stochastic trendlines have an upward trend as shown with the red lines over the tops and bottoms.

Figure 5 Weekly HUI Chart

Figure 6 Daily HUI Chart

The next two charts show the longer term (Figure 7) and shorter term (Figure 8) Elliott Wave counts. Figure 7 shows the longer-term count. The last update was correct in the assumption that the ascending triangle structure was not in effect (for a triangular structure, five internal waves must be in place with a corrective wave structure.... not here now). I am convinced that the pattern developing now is an impulsive one, which means blue skies with the occasional blip. The black trendline shows the lower longer-term trendline. The lengths of the first four waves were as follows:

(1) 41.04

(2) 16.92

(3) 95.13

(4) 40.77

Wave (5) has the range of movement up to 308 to 375. The move to 308 is based upon wave (5) being 1.618x longer in price than wave (3). The move to 375 is based upon wave (5) being 2.31x longer than wave (3)(note wave (3) was 2.31x longer than wave (1). When extended fifth waves complete, they are quickly retraced 61.8-95%. A target of 308 for an upside target would translate to a correction back to 125 to 189. I am not expecting wave (5).1 to complete until Decemberish 2003 until March 2004). Figure 8 shows the shorter-term count of wave (5) that we are currently in. The internal lengths of the first four waves were:

[i] 12.29

[ii] 5.64

[iii] 36.28

[iv] 15.65

Wave [v] currently underway has upside potential of 216 and 264. The move to 216 is based upon wave [v] being 1.618x longer in price than wave [iii] (a general requirement for impulsive segments...considering wave [v] and [iii] and identical currently. The move to 264 is based upon wave [v] being 2.95x longer than wave[iii]. Wave[iii] was 2.95x longer in price than wave [i], and ratios usually carry forward in the pattern. Based on this much more upside, if wave [v].1 is the extended wave, wave 2 should not drop below wave [iv].1 or 142. Fib date of August 18-19th for minor and minute degrees is coming up. Both scenarios above may not occur.....we may get a running correction. Wave 2's generally have sharp retracements....so something to be aware of. Since gold is where the money will be flowing, I spent more time in the analysis here.

Figure 7 Longer Term Elliott Wave Count of the HUI Index

Figure 8 Shorter Term Elliott Wave Count of the HUI Index.

S&P 500 Index

The first two charts show the weekly (Figure 9) and daily (Figure 10) for the S&P 500 with Bollinger Bands and full Stochastics (55,21,34 setting). Figure 9 shows the weekly BB's are converging, getting set for a move later on. The full stochastics have been basing for two years, with an upward sloping trend. This is suggestive that the next move down will not violate the prior lows placed in last year. Sloping trends with a weekly chart should not be ignored. Figure 10 shows BB's that are setting up to head lower. The red and green lines show market bottoms and tops based upon the stochastics crossing, respectively. The stochastics channel is in an upward moving channel, as shown with the red lines drawn over the peaks and troughs of the stochastics. The stocs gave a sell signal one month ago, but the stocs suggest two to four more weeks prior to a descent. With a sloping trend on the daily and weekly chart, it is suggestive that the October 2002 lows of around 775 hold. If we do break the ascending channel of the stochastics, that would be downright bearish, and a drop to 600 is in the cards.

Figure 9 Weekly S&P Chart

Figure 10 Weekly S&P Chart

The next two charts show the longer term (Figure 11) and shorter term (Figure (12) Elliott Wave counts of the S&P 500 Index. An interesting pattern has developed. The pattern I had labeled before emulated an impulsive pattern (see Figure 11). I had too many :3 labelings and this one seems to fit the picture the best in Fibs, trendlines and time relationships. The first yellow upper square shows the expected termination of the pattern (green preferred, brown the alternate). The lower yellow shows the thought range of 790-830 for completion of the flat pattern. The move down should be impulsive and possibly could go below the 775 level. However, the daily and weekly stochastics suggest the markets will bottom above last Octobers lows. If a larger degree flat is forming, then the wave [C]/b should retrace minimally up to 1250. If the move is part of a larger degree complex correction, then 1060 to 1160 will be the target. Given the time taken since a, there is a higher probability that a move to 1200-1250 is expected. Alternate count is we go below 700. Should that occur, then the prior-labeling scheme applies. Figure 12 shows the current move up since March 12, 2003. The pattern I was following emulates the impulsive count that is shown in this Figure.

Figure 11 Longer Term Elliott Wave Count of the S&P 500 Index

Figure 12 Shorter Term Elliott Wave Count of the S&P 500 Index

Summary

The above charts show the USD is set to continue sideways for one to two more months prior to placing a low in around the 90ish level. A significant rally can be expected at this point. The HUI is currently moving up like a rocket, and the trend should continue until Decemberish, 2003. A significant retracement of the HUI is expected after this completes, so selling a portion of ones gold stocks may be worth while at that point. The S&P was issued a sell signal one month ago from the daily stochastics, but the BB's suggest 2-4 more weeks of sideways market action prior to a break to the downside. The S&P is expected to correct down to 790-830ish late to early next year. A significant rally is expected thereafter.

The current markets are technically based, not fundamentally. The information presented here as any other technical info is only based upon what is currently available. Bad news, people or countries dumping the dollar etc. could occur, but indicators with longer settings tend to smooth out the noise and give a more cohesive picture of what is actually occurring. I hope to soon start doing analysis on some form of bond or T-bill.....still trying to find which one is most pertinent. The recent rise in bond yields is from GreenSpan stating the Fed will not intervene in the bond market. All of the market sideways motion, talk of sentiment etc etc. has a lot of bears waiting for the DOW to go to the very wise Richard Russels 3000 level. The unwinding to that level could take the better part of the decade and the markets are in no rush to get there, they will do as they see fit.


 

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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