Summary of Index Daily Closings for Week Ending January 14, 2005
|Date||DJIA||Transports||S&P||NASDAQ||Jun 30 Yr Treas |
|SHORT TERM FORECAST |
(Next Two Weeks)
|Market Rise||Medium||Very High||80%|
|Very Low Under||20%|
|INTERMEDIATE TERM FORECAST |
(Next 12 Weeks)
|TREND||PROBABILITY||Substantial||800 points+ (DJIA)|
|Substantial Rise||Low||Market Move||200 to 800 points (DJIA)|
|Market Rise||Medium||Sideways||Up or Down 200 (DJIA)|
This week the Dow Jones Industrial Average closed mildly down 45.96 points, in line with our Short-term TII reading of negative (13.50). Volatility was strong earlier in the week until a corrective wave quieted things by week's end. This week the 50 day moving averages were taken out by most major stock indices, a Bearish development as now the 50 day now becomes significant resistance. Breaking below the 200 day MAs would be a serious negative for the markets. All major averages are declining in harmony, no significant Bullish divergences in play. Any rally from here should be short-lived and unimpressive if the Bear is truly back in control, which we believe to be the case.
The 10 Day Average Call/Put Ratio, which is a contrary indicator that measures sentiment, sits at 1.19 Friday, and is still working off a "Sell" Signal from several weeks ago. A Buy signal would be given once that ratio drops to 1.00 and then turns up.
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|Equities Markets Technical Indicator Index (TII) ™|
|Week Ended||Short Term Index||Intermediate Term Index|
|Sep 10, 2004||(49.25)||(45.78)||Scale|
|Sep 17, 2004||(69.00)||(44.73)|
|Sep 24, 2004||(52.25)||(42.02)||(100) to +100|
|Oct 1, 2004||25.50||(37.23)|
|Oct 8, 2004||(58.50)||(35.56)||(Negative) Bearish|
|Oct 15, 2004||(24.50)||(35.48)||Positive Bullish|
|Oct 22, 2004||(15.00)||(36.93)|
|Oct 29, 2004||39.50||(40.06)|
|Nov 5, 2004||5.50||(35.28)|
|Nov 12, 2004||(6.50)||(27.63)|
|Nov 19, 2004||(50.00)||(23.18)|
|Nov 26, 2004||(54.25)||(26.88)|
|Dec 3, 2004||(56.25)||(30.50)|
|Dec 10, 2004||(88.25)||(42.42)|
|Dec 17, 2004||(37.00)||(44.25)|
|Dec 22, 2004||26.25||(46.17)|
|Jan 7, 2004||(13.50)||(37.75)|
|Jan 14, 2004||29.00||(29.17)|
This week the Short-term Technical Indicator Index comes in at positive 29.00, indicating a sideways to weak up move is probable. This indicator is a useful predictor of equity market moves over the next two weeks, both as to direction and to a lesser extent strength of move. For example, readings near zero indicate narrow sideways moves are probable. Readings closer to +/-100 indicate with a higher degree of confidence that an impulsive move up or down is likely over the short run. Market conditions can change on a dime, or the Plunge Protection Team can come in and temporarily stop market slides, so it may be unwise to trade off this weekly measured indicator.
The Intermediate-term Technical Indicator Index is useful for monitoring what's over the horizon - over the next twelve weeks. It serves as an early warning system for unforeseen trend changes of considerable magnitude. This week the Intermediate-term TII comes in at negative (29.17).
It is important to understand that markets - and especially equity markets - seek order. The order they seek often falls into neat, precise Fibonacci Ratio time and price intervals. In the charts we annotate each week, we often point out price retracements and advances that proceed, stop, and turn at precise Fibonacci Ratios in relation to prior price movements. What we have noted to be true, is that price trend tops, bottoms, and reversals also occur very often at precise Fibonacci time intervals with other turn dates.
Before going further, for the benefit of new subscribers, here's a thumbnail sketch of the mathematics of Fibonacci numbers and ratios, and why they might be integral to financial markets:
While Fibonacci numbers and ratios have existed since the Creation, a 12th century mathematician, Leonardo Fibonacci, is largely credited with identifying the unique sequence and ratios, and their prevalence throughout nature.
The sequence goes like this: It starts with the number 1 and then adds that number to itself to get the next number. It then takes those two numbers and adds them together to get the next number in sequence. Each number next in sequence is the sum of the prior two numbers in the sequence, ad infinitum. Thus the sequence looks like this: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, etc... The ratios between these numbers are unique in that each addend is either .382 or .618 of the sum. For example, 13 plus 21 equals 34. 21 is .618 of 34. 13 is .382 of 34. .618 plus .382 equals a complete 1.00. This holds true for all pairs. These pairs are known as phi mates. The world around us is filled with these ratios and relationships. Robert R. Prechter, Jr.'s amazing book, The Wave Principle of Human Social Behavior and the New Science of Socionomics, New Classics Library, 2002, does a terrific job running down how Fibonacci numbers and ratios are everywhere throughout nature. What is so amazing is that market price and time movements are also dominated by Fibonacci numbers and ratios.
About a year ago, we took notice that when the Dow Industrials ended their two-decade Bull Market on January 14th 2000, something spectacular occurred. It was as if that date was to become one of the most meaningful in the history of the markets. Yet, no one that I am aware of has identified it as such. What is so special about January 14th, 2000? Yes, the Dow Jones Industrial Average topped then, but so what? Yes, it can be said that January 14th, 2000 marked the official start of the Bear market. Again, what's the big deal?
Since this dramatic date, every single market top or bottom of measurable significance has occurred precisely in a Fibonacci .618 to .382 ratio of trading days from either that starting date 1/14/00, or another top or bottom that has occurred since 1/14/2000, based upon closing balances. This is astonishing! A mathematical formula has been 100 percent correct in predicting market tops or bottoms in the Dow Industrials since the Bear began on January 14th, 2000, exactly five years ago today! Every top. Every bottom. Every turn. Each, an exact Fibonacci ratio number of trading days from the Bear's start and from another top or bottom during that Bear. And the trend continues. And nobody is talking about it! You didn't hear about this from your Merrill Lynch research department folks, nor the happy faces on CNBC. Nope. You heard about it at www.technicalindicatorindex.com.
Let me give you an example of what we are talking about. October 9th, 2002's low for the Bear market came 687 trading days from the start of the Bear on January 14th 2000. This number of trading days happens to be essentially 61.8 percent of the number of trading days from 1/14/00 to a significant Bear market top, June 23, 2004's top, which occurred 1,115 trading days from 1/14/00. The ratio 687 to 1,115 essentially equals .618 - phi.
Here's another example. September 6th, 2000's top is 162 trading days from 1/14/00. September 21st, 2001's bottom is 423 trading days from the start of the Bear, 1/14/00. The ratio of 162 to 423 is a Fibonacci 1.0 minus phi, or .382.
Again, let me repeat, there is a either a .382 or .618 ratio relationship for every single top or bottom since January 14th, 2000 with another top or bottom since January 14th, 2000. The chart on the next page chronicles every top and bottom since 1/14/2000 and identifies each's phi mate, the other top or bottom that it shares a .382 or .618 ratio number of trading days relationship with.
What is fascinating is that in the early going, these Fibonacci phi ratios might be off a few thousandths of a percent here or there, but the further out from January 14th, 2000, the more precise the ratios are, hitting .382 or .618 almost right on the nose.
This log of phi mates, below, chronicles the amazing Fibonacci pattern that earmarks the current Bear market as something unusual in the making, a Bear market of particular significance in the annals of market history. Below are 22 tops and bottoms since 1/14/2000 that have a phi mate. 22 pairs over a five-year period. I'm sorry, but this is not a random occurrence. This is nothing short of bizarre. There is no logical explanation for it from a human perspective. It is not coincidence. I would love for one of my University mathematics professor subscribers with the time and interest to calculate the probability that all 22 consecutive pairs of tops and bottoms could be random. How's that for an article my fine-feathered Ph.D. friends? Do the calculation and I'll give you credit, be delighted to include the article in my Guest Articles section. Hey everybody, something huge, something surreal is going on here!
* 3/7/2000's Low is 38.0% of the total # of trading days from 1/14/2000's High to 5/26/2000's Low
* 5/26/2000's Low is 38.0% of the total # of trading days from 1/14/00's High to 12/20/00's Low
* 9/6/2000's High is 38.3% of the total # of trading days from 1/14/00's High to 9/21/01's Low
* 10/18/2000's Low is 38.8% of the total # of trading days from 1/14/00's High to 1/4/02's High
* 11/6/2000's High is 37.6% of the total # of trading days from 1/14/00's High to 3/19/02's High
* 11/22/2000's Low is 37.9% of the total # of trading days from 1/14/00's High to 4/29/02's Low
* 12/5/2000's High is 38.7% of the total # of trading days from 1/14/00's High to 5/14/02's High
* 1/3/2001's High is 37.6% of the total # of trading days from 1/14/00's High to 8/22/02's High
* 3/22/2001's High is 37.9% of the total # of trading days from 1/14/00's High to 3/11/03's Low
* 5/21/2001's High is 62.6% of the total # of trading days from 1/14/00's High to 3/19/02's High
* 9/5/2001's High is 38.0% of the total # of trading days from 1/14/00's High to 5/17/04's Low
* 9/21/2001's Low is 61.6% of the total # of trading days from 1/14/00's High to 10/9/02's Low
* 1/4/2002's High is 61.5% of the total # of trading days from 1/14/00's High to 3/31/03's Low
* 3/19/2002's High is 63.4% of the total # of trading days from 1/14/00's High to 6/17/03's High
* 7/23/2002's Low is 61.7% of the total # of trading days from 1/14/00's High to 2/11/04's High
* 8/22/2002's High is 62.1% of the total # of trading days from 1/14/00's High to 3/24/04's Low
* 10/9/2002's Low is 61.6% of the total # of trading days from 1/14/00's High to 6/23/04's Low
* 11/6/2002's Top is 61.5% of the total # of trading days from 1/14/00's High to 8/12/04's Low
* 11/27/02's High is 61.8% of the total # of trading days from 1/14/00's High to 9/7/04's High
* 12/27/02's Low is 61.8% of the total # of trading days from 1/14/00's High to 10/25/04's Low
* 1/14/03's High is 61.8% of the total # of trading days from 1/14/00's High to 11/18/04's Minor Top
* 12/5/01's Minor High is 38.2% of the total # of trading days from 1/14/00's High to 12/28/04's High
You know what I believe is going on? I'll tell you what I think is going on. I think God has a sense of humor. I think God gets a kick out of the arrogance of mankind. I think God is saying, "Hey mankind, the billions of transactions you millions of people conduct with hundreds of thousands of different points of view based upon tens of thousands of strategies based upon thousands of advisors and news reports all mingles together to result in prices that move exactly how I decide they will; will top and bottom when I tell them to, that ultimately I am in control, and here is the proof, so humble yourselves and seek my face." That's what I think God is saying. To me it is either God, or a random sequence that is astronomically improbable. That's just my take. I'd love to hear yours.
The chart below is a picture of these Fibonacci phi ratio relationship tops and bottoms since 2000. It is getting a bit busy since we began showing it about a year ago. We may have to start showing this on two charts if it continues into 2005 and beyond. At some point I believe God will say, "I've made my point," and the amazing ratio relationships will cease. But in the meantime, it is worthwhile, I believe, to project what the possible tops and bottoms might be in 2005 based upon this pattern's continuance.
Back in the spring of 2004, we projected likely tops and bottoms for the rest of 2004 based upon this formula. We accurately forecast June 23, 2004's turn, September 7th, 2004's turn, October 25th, 2004's turn, and November 18th, 2004's turn to the exact day! We failed to see August 12th, 2004's turn and December 28th, 2004's turn mainly because we assumed this phi ratio relationship was based upon only prior major tops and bottoms. We didn't project future turns based upon minor tops and bottoms of the past. The point is, since this golden ratio has been consistent so far during this Bear market in the DJIA, it is therefore logical to extrapolate this phi ratio into the future in order to determine high probability bifurcation points - future tops or bottoms.
Therefore, based upon the assumption that this Fibonacci phi relationship formula between tops and bottoms since January 14th, 2000 will continue, we have calculated the probable turn dates for 2005, including minor as well as major prior tops and bottoms as mates. It should be understood that since the dates we are now projecting are so far out from January 14th, 2000, that dates that hit the .382 or .618 timeframes can vary by plus or minus a day or so. In other words, if we say 1/20/05 is a likely turn date, it means that 1/19/05 or 1/21/05 also calculate to a phi mate approximate .382/.618 ratio.
Probable Tops/Bottoms Turn Dates in the
12/5/01's Closing Minor Top is 38.2% of the total # of trading days from 1/14/00's High to 12/28/04's High.
While we cannot be sure if this will be a top or bottom, nor be sure if it will be a major or minor turn date, it is likely to be a turn date, plus or minus a day or so. 12/14/01's Minor Low is 38.2% of the total # of trading days from 1/14/00's High to 1/20/05.
3/11/03's Major Bottom is 61.8% of the total # of trading days from 1/14/00's Top to 2/15/05.
This could end up being a Major turn date since it is phi mates with two prior turn dates.
3/21/03's (note the exact same day two years earlier) Minor Bottom is 61.8% of the total # of trading days from 1/14/00's Top to 3/21/05.
5/12/03's Minor Top is 61.8% of the total # of trading days from 1/14/00's Top to 5/26/05.
5/20/03's Minor Bottom is 61.8% of the total # of trading days from 1/14/00's top to 6/10/05.
6/17/03's Major Top is 61.8% of the total # of trading days from 1/14/00's top to 7/25/05.
This could be a Major turn date since it is a phi mate with two prior turn dates (it is interesting that our double phi turn dates in 2005 are occurring around equinoxes).
This could also be a Major turn date since it is a phi mate with two prior turn dates. Again, it occurs around a seasonal change date, a few days after the start of winter.
For those of you bothered that some of these turn dates calculate extremely close, but not exactly as .382/.618 ratios, let me say this. In the overall scheme of what we are talking about here, a few thousandths of a percentage point is non-consequential, especially considering the end-point is to be able to project future market turn dates. But if you need a better explanation, perhaps this: Phi/phi is not really a ratio. It is a number that has no end. Its decimals continue forever - infinity. If you were ever wondering if you could come close to infinity, well numbers like pi and phi are close examples of eternity. Divide the Fibonacci numbers 13 by 34, or 21 by 34 (note: 13 + 21 = 34). You come close to .382 and .618 ratios, but never quite get exactly there. .618 is a reasonable approximation of phi. Here's something else interesting. Phi is the value 1.618 whereas phi is the value .618. If you multiply Phi by phi you get the value 1.0. This is truly an amazing number.
How important is Phi/phi? The Egyptian pyramids were built to be structurally sound using Phi ratios and measures.
More random thoughts. What makes this Dow Industrials phi mate phenomenon even more amazing is the element of human intervention into the selected components of the 30 mega-company stocks chosen for inclusion in this index. The Dow Jones Company, Inc. changes the companies included in this average every so often, and in fact has made several changes during the five-year period studied from 2000 to 2005, yet the phi mate pattern still works!
The two Analogs on the prior page capture the psychology of today's equity markets with neon red-light warnings. Something is not right with equities, which means something is not right with our economy. Investors have been anesthetized by happy talk that is nothing more than burying the truth under the sand, sweeping our problems under the carpet for political expediency and for Wall Street's self-absorbed gains.
The periods analyzed with these analogs were chosen because they represented two of the secular (major) Bear markets of the twentieth century. We should be concerned that equity markets are mirroring price behavior almost day for day with similar patterns from the past. The period leading up to now has been nothing short of remarkable in similitude. It is at the current point in the patterns that markets began their long-running crashes. And, sure enough the turn down has occurred right on cue. Hey, this is not data mining. It is comparison of past Bear market stock behavior with current Bear market stock behavior. You can't make this stuff up.
2004/05 is paralleling the great crashes of 1972/73 and 1928/29. Period.
The chart below shows a measure of Bullish/Bearish sentiment, the SPX to VIX ratio. It is a contrary indicator under the theory that once the pendulum swings from over-pessimism to overoptimism, the pendulum is about to swing back again the other way. This has implications for stocks. Whenever this ratio rose above 68, the S&P 500 not just fell, but crashed. Whenever this ratio fell below 35, nice rallies started. Two exceptions. Back in 1998/1999 we saw a long-term pattern that led to an extreme peak. Because it took so long to develop, the subsequent crash was the start of a massive Bear market. Same pattern has showed up again from 2003 into 2004, meaning another major Bear is about to start, or may in fact be starting. Note the similar upside down "V" patterns evidencing the pinnacles.
It sure looks like the Dow Industrials will be forming a Bearish Head & Shoulders Top pattern with the coming Minuette degree wave ii rally. A 38.2 percent retrace of i down - assuming i down is complete - would rally prices back up to 10,640. That would make a perfect Right Shoulder from which prices could plummet. The top of Right Shoulders usually represent some of the best short-term shorting trading opportunities for those so inclined. We have a phi turn date coming up next Thursday. Putting a possible scenario together, given next week is a holiday week and an options expiration week, could it be that prices rally into our turn date, then fall hard as Minuette degree iii takes over? Or, prices could decline into next Thursday's turn, wrapping up Minuette degree wave i down, to be followed by a few weeks of Minuette degree ii up. The Analogs argue that ii up completes next week., and is shallow. Food for thought.
The MACD is nowhere near levels seen at prior major lows, so any turn up from here would likely be a Bear Hook while prices work off an oversold condition. But looking at the MACD above, it does not look ready to turn up quite yet. The RSI sits in Neutral territory, again nowhere near oversold levels seen at prior significant lows. Prices busted through their 50 day moving average - Bearish. The short-term Elliott Wave count is a bit choppy and unclear, so it is difficult from the EW perspective to determine if Minuette ii has started yet, or i down is still completing. At this point, Bearish traders wanting to get in should wait for Minuette ii. Stay with us as we track that development.
The short-term view of the S&P 500 shown above (courtesy of www.stockcharts.com) indicates that a small Rising Bearish Wedge pattern for Minor degree wave 5 completed inside a larger Rising Bearish Wedge for Intermediate degree wave 5 up that also completed Monday January 3rd, 2005. Since then we have seen prices decline impulsively in a Micro degree 1-2-3-4 move. It is unclear whether Micro 5 is complete, or partially so, and whether there is another lower thrust coming for Micro degree wave 5 down to complete Minuette degree i down or not. Regardless, if this is in fact the major top we've discussed, prices should continue to work their way lower from here in stair-step fashion, with Minuette degree ii up due next. Both the RSI and MACD have formed Bearish directional divergences with prices. The RSI has plenty of room to decline further, and the MACD is headed lower with strong momentum.
The charts on the next page examine Light Crude ($WTIC). Long-term, prices remain nicely inside their rising Bullish trend-channel. The Elliott Wave count for the rally since 2001 suggests there is one more multi-month meaningful increase in Crude prices coming, once Intermediate degree wave 4 completes. It is possible wave 4 finished in December '04 and that a higher thrust is just getting started. A move to the upper trend-line would make sense as the other four turns bounced off upper and lower boundaries. That portends Oil rising to $60/bbl over the next 3 to 6 months, which fits with the Bearish stock charts. However, there is also the possibility that Oil is forming a Bearish Head & Shoulders pattern that portends prices declining to $27. For that to happen, prices must soon break below $41/bbl.
The Federal Reserve reported that Industrial Production rose 0.8 percent in December, up 4.1 percent for the year 2004. Capacity Utilization came in at 78 percent for 2004, below 2000's 82 percent.
So much for the good news. U.S. Chain Store Retail Sales fell 0.6 percent for the week ended January 8th, 2005 according to the International Council of Shopping Centers and the UBS.
The U.S. Trade Deficit hit another new all-time high for a month, in November, $60.0 billion, according the Commerce Department. Here's a reality check: November 2004's Trade Deficit was fifty percent greater than that of a year ago! Fifty percent! It rose $20.3 billion above November 2003's $39.7 billion. And this damage happened as the Dollar plummeted from 93.75 in November 2003 to 81.81 in November 2004. The falling Dollar was supposed to fix this problem. Can you imagine how bad it would be had the Dollar risen? No wonder the technical charts look so awful.
The Labor Department reported that it estimates Wholesale Prices fell 0.7 percent in December 2004. "Core" PPI rose 0.1 percent, they say. Looks like the most loyal agency in Washington will provide the documentation that the Master Planners need to reverse their strategic course in interest rates, and push them back down should equities collapse. After all, they have to get home equity lending going again, because according to the Mortgage Bankers Association, Applications for U.S. Home Mortgages fell 3 percent for the week ended January 7th, 2005.
Initial Jobless Claims rose to 367,000 for the week ended January 8th, 2005, and the four week average was also up. According to a story by Reuters as reported at www.cnnmoney.com on Monday, The Economic Policy Institute for the U.S.-China Economic and Security Review Commission, a congressionally appointed panel, calculated that the United States lost 1.5 million jobs to just China alone between 1989 and 2003. But, we all knew that, didn't we?
Money Supply, the Dollar, & Gold:
M-3 came in flat this week after being raised 57.2 billion the week before. The Federal Reserve has seen increasing risks to the markets and economy, particularly equities, and has begun what we expect will be a series of huge periodic increases in Money Supply to lift all boats in a rising sea of liquidity. The last time this happened was in April/May 2004 when equities were primed to crash. At that time the technical condition of the market was as bad as now, and the Fed knew it. Their modus of operandi back then was to goose M-3 about every third week for three months. The approach was/is a stealth strategy. It wouldn't look good if while they jawbone inflation concerns, they are caught pumping money into the system. It will be interesting to see if the strategy works once again. The strategy - should it develop as we suspect - should be good for Gold and bad for the Dollar. At some point you'd think foreign holders of U.S. financial assets would have enough and start selling. That's a risk that could prevent the Fed from bailing out markets once again. In any case, government intervention in the money supply has been shown in the past to manipulate markets in such a way as to confound the technical charts for short periods of time. We'll see how it affects things over the next few months. Stay tuned.
The trade-weighted U.S. Dollar fell this week, according to our expectations in last Friday's newsletter. However, while we lean toward the Elliott Wave count annotated below (chart courtesy of www.stockcharts.com), there is an alternate count that indicates the U.S. Dollar has bottomed for a while and that primary degree wave (2) up is underway already. While that is possible, we believe the higher probability is that the Dollar has one more wave south to complete, probably falling into the high 70s area at least, before rising into corrective wave (2) up.
Here's our thinking: The Dollar has been touching its upper and lower long-term trendchannel boundary lines at directional turns, so we believe the Dollar will seek its lower boundary before turning up. That argues for the recent high around 83.79 a few days ago to be merely the top of Minor degree wave 4 down, and not the end of Minuette degree wave i up. The move down in what we have labeled Minuette degrees a to b counts either as a five-wave or a three wave, depending on how you look at it, believe it or not, so it can be counted as a "b" or a "5" wave down. The move from what we've labeled b to c counts as a clean five-wave impulse, but that qualifies for either interpretation, as a "c" up or a "i" up. Another reason we do not believe the Dollar's decline has reached bottom in the short-term is because of the importance of proportionality of waves. For the count to suggest we hit bottom at the end of December means Minor degree 2 is out of whack in proportion to minor degree 4, and also that Minor degree 4 retraced an unusually small portion of Minor degree 3 down, less than the usual minimum retrace of 38.2 percent.
The RSI is neutral, so not much help here. The MACD is curling over like it wants to go lower. And as we mentioned before, it looks like the Fed is pumping liquidity again. In any case, we should have our answer soon enough.
The Gold Bugs index may be approaching a short-term bottom, what we have labeled Minuette degree i. The fifth wave down inside the Micro degree fifth wave down looks very close to completion, perhaps we'll see it bottom around 200. Next would be a small corrective wave of the decline since November 5th's 248.18 high, which has essentially been a 19.3 percent crash. That correction should carry the HUI up at least 38.2 percent of the decline, to about the 218 area. More rally than this is possible, however given the negative technical big picture for stocks, we don't believe this countertrend rally will carry much force. A rally from here is not starting anywhere near the previous lows for the MACD, nor RSI, a clue that once the corrective Minuette degree wave ii is complete, more strong downside action is likely. However, even though the move down has been sharp, it is merely the completion of a consolidation A-B-C Intermediate degree wave 2 down - looking like a "flat." Once prices hit the 180 area, we should be at the bottom of Minor degree C of 2, to be followed by a powerful rally for several months, Intermediate degree wave 3.
Gold finished its Bearish Flag pattern shown last week at the bottom boundary of the Ascending Bullish Triangle pattern, completing Minor degree corrective wave 4 down. Next should be a decent rally that has the potential to reach 500 over the next three to six months, a fifth of a fifth wave to complete primary degree (1) up in this Bull market in Gold. Both the RSI and the MACD look to be stalling, ready to reverse to the upside from oversold levels. If the Fed is going to pump M-3 like we think they will, Gold will benefit.
Silver never reached its downside target based upon the usually reliable Bearish Flag pattern. Breakouts below the upside-down "Flag" should equal the distance of the Flagpole that preceded the Flag consolidation. On the chart we marked the initial Flagpole "A." The decline from a breakout should equal "B," about 1.60, with a downside target of 5.15. Gold had a similar pattern and hit its downside target. Silver hasn't even come close, falling only about a third of its projected decline. While Gold is poised to rally, Silver has this unfinished target to contend with and also has just declined below its declining 200 day moving average. Both are Bearish indicators. It could be that Silver will diverge against Gold and move lower while Gold heads higher, or it could be that Silver misses its projected downside. Since Silver has industrial use whereas Gold does not, an economic slide could push Silver lower while Gold heads higher. Or, both could rise from here. Technical Analysis can only point out risk. Risk does not always mean certainty. This appears to be one of those times.
Bonds. The long-term Head & Shoulders top is still in play, and unless prices blast past the top of the Head, above 121.45, the pattern will remain in force. It is a massive creature with ominous repercussions should the highly reliable pattern be confirmed. To confirm, prices would have to drop decisively below the neckline, below 100. If that were to occur, the minimum downside target would be 79-ish. The Elliott Wave count we believe to be most accurate at this time has prices completing the first two of a five-wave impulse rally that will wrap up Minuette degree v of corrective Minor degree c of an a-b-c retrace. From there we expect the Trade Deficit and Dollar damage to catch up to Bond prices as they head lower hard and fast. The only thing delaying this would be a massive deflationary Recession. But even then, the Fed would likely pump so much money into the system, Bonds would tank anyway. This rise in long-term rates that we expect may not begin for another few months, but when it comes, it should spell disaster for the Real Estate Bubble.
Speaking of Real Estate, The Morgan Stanley REIT Index has been Vertical since 2000, with only a few minor corrections interrupting the feast. But something has spooked this market. The problem is we can count a nice clean five waves complete at January 3rd, 2005's 776.08 top. Signaling the turn down are several factors. First, the last wave in December 2004 was a Rising Bearish Wedge pattern, which is a terminal. Second, the impulse decline in January 2005 hit 702.98, breaking below the prior wave 4's bottom, 710.68, usually a signal of a trend change. Momentum is down hard, as prices have plummeted 9.5 percent in a mere seven trading days, and doesn't look like it is ready to turn up any time soon. Prices have broken decisively below their 50 day moving average, which should now act as resistance. The RSI is pointing toward a short-term oversold market, but any corrective rally from here is only likely to recharge the Bear's ammo. We might see a Bear Hook form on the MACD with the minor corrective rally. Prices should not exceed January 3rd's 776.08 for the Bearish case to remain intact.
If you look at the long-term charts, the rise in the REIT index looks almost parabolic. We know that Parabolic Spikes do not resolve peacefully. They are usually followed by waterfall crashes. Should prices fail to reach a new high with this next rally, grab a life jacket. This baby's going down under.
Bottom Line: The technical and fundamental picture is becoming more precarious for markets and the economy. We see the Fed has already started buoying money supply to prop up prices as the risk of collapse grows. At some point more fiat currency will just make matters worse as the Dollar sinks too far too fast in response to oversupply. The raging battle continues. Can the Master Planners delay the coming decline? Maybe not this time. We have four phi turn dates coming up over the next three months. That is an unusually high number of turns in such a short period of time. This implies volatility is about to hit markets unexpectedly. Stay with us as we monitor developments. Caution remains warranted.
"The nations have sunk down in the pit which they have made;
In the net which they hid, their own foot has been caught.
The Lord has made himself known;
He has executed judgment.
In the work of his own hands the wicked is snared.
The wicked will return to Sheol,
Even all the nations who forget God.
For the needy will not always be forgotten,
Nor the hope of the afflicted perish forever.
Arise, O Lord, do not let man prevail;
Let the nations be judged before Thee.
Put them in fear, O Lord;
Let the nations know that they are but men."
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2005 Promises to be volatile, with many surprises and opportunities along the way. We hope you join us for this exciting adventure!
|Key Economic Statistics|
|Date||VIX||Dec. U.S. $||Euro||CRB||Gold||Silver||Crude Oil||1 Week Avg. M-3|
Note: VIX and the Dollar decline. CRB, Gold, Silver & Oil are up.