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Financial Markets Forecast and Analysis

Summary of Index Daily Closings for Week Ending February 4, 2005

Date DJIA Transports S&P NASDAQ Jun 30 Yr Treas
Jan 31 10489.94 3598.48 1182.27 2062.41 114^27
Feb 1 10551.94 3605.73 1189.41 2068.70 114^26
Feb 2 10596.79 3604.17 1193.19 2075.06 114^28
Feb 3 10593.48 3579.48 1189.89 2057.64 114^26
Feb 4 10716.13 3597.81 1203.03 2086.66 115^29

(Next Two Weeks)
Substantial Rise Low      
Market Rise Medium   Very High   80%
Sideways Medium   High   60%
Market Decline Med/High   Medium   40%
Substantial Decline Medium   Low   20%
      Very Low Under   20%
(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)
Sideways Medium      
Market Decline High      

This week the Dow Jones Industrial Average closed up 288.93 points. Nice rally. We were not looking for a significant bottom on January 24th, which appears to be what we got. Rather we expected a small up move to be followed by one more strong thrust lower to a trough around 10,200 for the significant bottom to this Intermediate-term decline from December 28th, 2004. Thus our Short-term TII reading last week was wrong. However, there are several indicators we follow that suggest this rally may not have the beauty that meets the eye, with our expected decline to 10,200 or lower around the corner.

One concern for Bulls is the January decline never ended with a heavy, sharp, panic sell-off and thus never established a selling exhaustion base to support a sustained significant long-term or even intermediate-term rally. What was proceeding as a nice cleansing decline was interrupted by stealth mass infusions of liquidity by the Federal Reserve which we've been warning about for several weeks. That 115 billion of fiat currency they just printed out of thin air and pumped into the economy has to go somewhere, and it is finding its way into stocks and bonds. What it means is more bubbles, more lofty levels from which the coming decline will come - a worse sell-off than was otherwise necessary.

Effective March 1st, only paid subscribers will have exclusive access to these reports.

Equities Markets Technical Indicator Index (TII) ™    
Week Ended Short Term Index Intermediate Term Index    
Oct 1, 2004 25.50 (37.23)   Scale
Oct 8, 2004 (58.50) (35.56)    
Oct 15, 2004 (24.50) (35.48)   (100) to +100
Oct 22, 2004 (15.00) (36.93)    
Oct 29, 2004 39.50 (40.06)   (Negative)  Bearish
Nov 5, 2004 5.50 (35.28)   Positive  Bullish
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)    
Jan 21, 2004 (25.50) (21.83)    
Jan 28, 2004 (39.75) (31.63)    
Feb 4, 2004 (11.95) (33.08)    

This week the Short-term Technical Indicator Index comes in at negative (11.95), indicating a peaking move is occurring, with decline potential 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 (33.08).

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.

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?

Here'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 1/14/2000, 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.

Highlighted above are the turn dates we predicted this past year based upon these Fibonacci phi mates. We took a look at past major tops or bottoms and calculated when a future phi mate bearing a .382 to .618 number of trading days relationship would take place. We missed the 8/12/04 and 12/27/04 turns because we did not consider past minor tops/bottoms as possible phi mates. But the minor turns have become important in predicting future turns, so we will consider them going forward.

As we get further from January 14th, 2000, we are finding that more than one date works mathematically, and in some cases four or five days work, so we may be left with isolating future turns to an error rate of +/- 2 days (instead of +/- 1 day), which still is astonishing when you think about it. We forecast that January 20th, 2005 would be a turn date. This worked out to be within two trading days of two turn dates that work out to be exact Fibonacci phi mates with December 14th, 2001's minor low. January 18th's minor top had a .618/.382 ratio relationship, as did also January 24th's significant bottom, with December 14, 2001. In the chart we've given credit to January 24th, 2005 since it appears to bear greater significance at this point.

Next on the radar screen is what we believe will be a major turn date. Any of four dates work out mathematically to a phi mate .382/.618 relationship with the major bottom back on March 11th, 2003. Phi turn dates off of prior major turn dates tend to be major turns in themselves. Any of the following four dates work: February 14th, 15th, 16th, or 17th, 2005. So call it a key reversal week. The math works best for February 16th, which is 1,280 trading days from January 14th, 2000's top and is 489 trading days from March 11th, 2003's bottom. March 11th, 2003 was 791 trading days from 1/14/00. Here's the math: 489/1,280 = .3820 and 791/1,280 = .6179. So call the next turn for February 16th, 2005. What we do not know is whether this will be a top or a bottom. We see either as a possibility at this time. The picture should clear as we watch prices over the next week. If they trend higher, look for a significant top on or about Feb 16th. If they turn down, look for this day to represent a sustainable bottom, kicking off a decent multi-week rally. However, one caveat. The next phi turn date after February 16th is not that far off - early March. The close proximity of these phi turn dates suggests volatility is coming.

Well in hindsight, clearly January 24th, 2005 is a significant bottom. The Percent of DJIA stocks over their 30 day moving average, pictured at the top of the next page, happily told us so, dropping below the 15 percent threshold to 10.00 on January 21st. However, the percent of DJIA stocks over their 10 day MA, 5 day MA, and 14 day MA all have since climbed to overbought territory (all at 90.00 readings) with Friday's buying burst. This is curious, and negative for stocks short-term, but also warns the up move does not have the power of the recent down move because the last trip south for the percent of stocks above their 10 day moving average from above 80 to below 15 came with a 500 point decline in the DJIA, whereas the trip back north from January 21st's 10.00 reading to Friday's 90.00 reading has been accompanied by only a 348 point rise. That feels corrective.

Question: What happened to stocks the last two times the 10 Day MA became overbought while the 30 day MA was in neutral territory? Did stocks subsequently go up until the 30 day MA indicator became overbought, or did they turn down, sending the 30 day indicator back to oversold territory?

The first case to study was August 2nd, 2004's top. On that day the 10 day MA indicator hit an overbought reading of 80.00. At the time, the 30 day MA indicator was only 50.00. On cue, the 10 day indicator then fell to 0.00 August 6th as stocks fell sharply 364 points in only four days. The 30 day MA indicator followed the action lower, reaching an oversold 6.67 reading on August 6th. For all intents and purposes that was the bottom of the intermediate move down from June 23rd's top, although prices and indicators languished at the bottom through August 12th, before starting their next intermediate move up. It is interesting to note that the 10 day MA's extreme overbought reading that trumped the 30 day MA indicator's reading was accompanied by the 5 day MA's overbought extreme 80 reading as well, with this very short-term indicator giving us a prescient one day warning of the impending top, hitting 80 on July 30th. While the 14 day MA indicator did not hit the over 80 overbought area, the stochastic did confirm a top was in when the fast indicator dropped below the slow indicator on 8/3/04.

Second case study, October 4th, 2004's top. Again, no indication of a top by the 30 day MA indicator, sitting in neutral territory, apparently on its way up from oversold territory to hopefully overbought territory. However, once again the 10 day indicator did signal a top, hitting 80.00 two days earlier on October 2nd. Which would win? Well, on cue, only two days later, stocks fell from a small top for the next two weeks until bottoming 490 points lower on October 25th, 2004. Again, the 5 day MA indicator joined the 10 day at an extreme overbought reading, the 5 day giving an early warning hitting 93.33 on October 1st. This time the 14 day MA indicator joined the 10 day and 5 day at an extreme top reading of 80 on 10/6/04. The stochastic confirmed the significant turn down as the fast reading crossed under the slow reading the next day, on 10/7/04. Once again, the shorter-term indicators trumped the 30 day as their intermediate-term moves down needed one more powerful thrust lower.

So given this recent history, where does that leave us now? We have the same situation today. The 30 day MA indicator has risen from oversold territory but is stuck in the middle, at 63% Friday - neutral. Will it have the chance to run to overbought territory (it will if this rally is an intermediate term move up), or will the 30 day turn down (it will if the January 2005 intermediate-term move down needs one more powerful thrust lower)? The 14 day, 10 day, and 5 day all sit at extreme overbought readings of 90.00 Friday, so all are warning that prices have peaked or are very near to a peak, and the Dow Industrials should decline sharply soon until all four indicators reach oversold territory - if history repeats itself. The 14 day stochastic has not rolled over yet, so there is no confirmation of a decline from that indicator. But that should follow prices lower should they decide to drop from here.

Let's combine the two technical tools we've just covered to gage some options for the market over the next few days and weeks. The next Fibonacci turn date is set for the week after next, with February 16th the most precise mathematically. We see three of our four "percent above MA" indicators screaming a top is a day or so away. History suggests these percent indicators are right. So, we could see prices begin a sharp thrust lower beginning next week, taking prices down to the 10,200 area or lower to complete the intermediate-term decline from December 2004, likely bottoming on or about February 16th, in a week and a half. That would set up a sharp rally from mid-February into early March, when another Fib turn date arrives. Or, we could see a minor decline over the next few days, followed by another sharp rally later in the week through February 16th, making that phi turn date a top, likely accompanied by overbought readings in all four of our "percent above MA" indicators. That would set the stage for a sharp decline from mid-February into March. The next two analogs agree.

Here's the Best Case Bullish Scenario for the S&P 500, Which isn't so Bullish.

We mentioned this scenario back in issue no. 111, page 10, on January 7th, 2005 (available in the archives at www.technicalindicatorindex.com). Here we consider the move up from January 24th as the start of the final topping rally for many years to come for the S&P. The move from January 24th to Friday February 4th would be a minuette degree wave i up of Minor degree 5 up of a final grand Supercycle {III} top. This would mean the overbought levels we are seeing in our "percent over MA" indicators are signaling the start of Minuette ii down beginning next week. If this alternate Bullish scenario is occurring, then the January 24th lows (1163.75) should not be broken. This ii move lower would likely wrap up around our Fibonacci Feb 16th, turn date, at a Fibonacci ratio retrace level of i up, to be followed by an impulsive rally for Minuette iii up into early March's phi turn date. By Late March or April, the entire move up should be complete and the worst long-term Bear market in the history of equities would then begin. This final top would be a truncated fifth since the S&P is not going to rally 350 points over the next two months and exceed its March 24th, 2000 all-time high of 1,553. Truncated fifths are typical terminations, so the pattern would fit. The first chart on the next page shows a closer view of this Bullish scenario count.

Then again, there are problems with this Bullish scenario. One being, the Dow Industrials are not in sync with the S&P. In the DJIA, due to Elliott's rules, we cannot see the rally from January 24th as the start of a fifth wave up because prices declined in January into wave 1's area. We'll cover that shortly, but first let's chart the Bearish scenario that still remains valid for the S&P 500. That appears at the bottom chart of the next page (courtesy of www.stockcharts.com), and the top of page 11.

The Bearish view of the S&P 500's price action claims that January 3rd, 2005 was the top. The top. The Grand Supercycle, Supercycle, Cycle, Primary, Intermediate and Minor degree wave top. The move from January 3rd to January 12th was Minuette degree wave i. The rally since was an a-b-c, Minuette degree wave ii up rally that took prices to two points above of a perfect 61.8 percent retrace of Minuette degree i down on Friday, February 4th. This scenario points out that in spite of the recent rally, prices never exceeded the January highs, and thus the Bear down-leg that began in 2005 remains intact. In this labeling, Micro degree a is also within two points of a perfect .618 relationship with Micro degree b, and b is a perfect Fibonacci .786 of Micro wave c. So the labeling has order to it.

The Bearish view also notes a Head & Shoulders Top that started in November. This week's thrust finishes off a nice Right Shoulder. Should prices decline below the neckline with this next move lower, to below 1172, the pattern would be confirmed and its reliability increased. Here's the major problem for the Bulls. The minimum downside target for this H&S is 1,127. If prices decline to that level before rising above January 3rd's 1,217.90 top, then Elliott's rule where a wave four cannot invade the territory of a same-degree wave one would be violated as the top of Minor degree wave 1 back on September 21st was 1,131. For prices to decline below 1,131, it means Minor degree 5 up of all larger degrees wave fives up is over and the next down-leg is underway. Another possibility is that the fivewave impulse move up from January 28th is a Minor degree wave 5, not a Minuette degree wave i (refer to Bullish scenario chart count), meaning the grand top is in as of February 4th. That count lacks proportionality so we don't favor that. But it is a possibility. The RSI is overbought on the short-term charts, supporting our call for a decline next week, regardless of which scenario you choose to accept.

Here's why the DJIA is out of sync with the S&P 500's Bullish scenario. The DJIA cannot go above its December 28th highs unless it is about to rally about 3,000 points - not likely. Unlike the S&P 500, the DJIA's late 2004 rally did not start in August, but rather in October. It is missing one key up-leg that the S&P 500 has, messing up the count for the Bulls. Thus the labeling we are left with in the DJIA is that the move up from October 25th to December 28th was either a completed Primary degree wave (5), an impulse move consisting of a completed five Minor degree waves, shown above. Or, it was merely Minor degree 1 of a yet-to-come five-wave sequence that projects prices going to 14,000 this year. For a bunch of reasons, we think that is unreasonable to expect, so will dismiss it, key of which is PE valuations. Too high. So back to reality.

What if, Bulls ask, the move up from October 25th to November 18th is Minor degree wave 1 up? Then what if the sideways move from November 18th to December 9th is corrective Minor degree 2? And what if the move from December 9th's low to December 28th's high is merely Minor degree wave 3? Can't the move down from December 28th to January 24th be Minor degree 4, and we are now starting a wonderful rally that will take prices to 11,500 - Minor degree wave 5 up? The answer is no because in that labeling, Minor degree 4 down has invaded the territory of Minor degree 1, a violation of Elliott's rules. So one thing we can be sure of is that the decline in January is not a Minor degree 4 down.

The other odd aspect to the Bullish case is that the move down in the DJIA from December 28th counts quite well as a five-wave impulse (much cleaner than the S&P's count), and the move up from January 24th counts as a three-wave. This has the scent of a down-leg intact. Bearish.

I mentioned in an interview this past week that the Transportation Average could be leading the Dow Industrials and other major stock averages lower. While all eyes are focused on the glorious S&P 500 and its terrific rally of late, the Transports are quietly declining from a Parabolic Spike top in a perfect, textbook, Elliott Wave five-down, three up wave sequence.

Before we get into the wave count, let's point out that the really big declines are often led by the Transports. This occurred back in 1999/2000. They seem to get out ahead of the other averages when bad times are near. We have a primary Dow Theory non-confirmation (Trannies hit an all-time high in December 2004; Industrials did not, hitting their all-time high five years earlier). Bearish. This average must be watched.

Now the chart. Trannies have declined from their 12/30/04 top at 3,823.96 to their Minuette degree i low on January 24th of 3,454.74, a 9.6 percent three week decline. The rally since January 24ths has traced out a clean a-b-c correction, retracing 44.3 percent of Minuette i down. The turn points have touched the declining and rising trend-channel's boundaries on cue. It looks as though Minuette degree wave iii down is underway, with the first two waves of Micro 1 down in the books. The RSI and MACD look like they may be tracing out Bearish Head & Shoulders tops.

Parabolic Spikes do not have happy endings, do not have soft landings, but are followed by crashes. From August to December 2004 there were no corrections. It is payback time. There was a Rising Bearish Wedge pattern that took a year to develop. Typically prices return to the base of that formation - in this case a target of 2,750.

The Economy:

Lots of news this week. The Institute of Supply Management reported its Index of Manufacturing fell from 57.3 to 56 4 in January. Its Non-manufacturing Index fell sharply from 63.9 in December to 59.2 in January. Factory Orders rose 0.3 percent in December, down from November's 1.4 percent increase according to the Commerce Department.

New Home Sales rose in December, but only by 0.1 percent. Construction Spending rose sharply, up 1.1 percent in December, according to Commerce.

One of the big stories this week was Social Security. Bond wizard Bill Gross, manager of the world's largest bond fund came out this week vehemently opposed to the privatization plan, in a story reported Friday on www.CNNMoney.com. Equity markets will likely judge the plan as a plus, as more money would be available for stocks. However, as IRA holders have learned, an individual managing his own money can get walloped by a Bear market, a valid argument for the safety net. The technicals suggest this plan may be coming out at a bad time.

Former Treasury Secretary Robert Rubin is Bearish the Dollar and warned of worsening U.S. Deficits in a story by Reuters posted by CNNMoney on Friday. No question he's right.

The second big story this week was the Jobs data. The Labor Department reported that the U.S. only created 146,000 Non-farm payroll jobs in January, about enough to meet population growth, so no net reduction in the already large pool of unemployed workers. And in keeping with the spirit of this Department's modus operandi, they politely revised the past month's guesstimate down sharply, allowing that far fewer jobs were actually created in December 2004 than was initially announced. They reduced December's figure by 24,000, a 15 percent correction. We learned this week that the SBC-ATT Merger deal will cut another 10,000 jobs from the economy. Challenger, Grey, & Christmas, the outplacement firm, reported that 92,351 jobs were cut in January. To show you how bad things really are, this figure was ballyhooed for being the first time in six months the figure came in under 100,000. Productivity growth slowed to an annualized 0.8 percent in the fourth quarter, 2004 according to the Labor Department.

And the third big story this week was the Fed's decision to raise short-term interest rates another quarter percent to 2.5 percent. While the left hand caught everyone's attention, and pretended to tighten, the right hand was doing the real magic, adding another 17.3 billion in Money Supply.

Money Supply, the Dollar, & Gold:

M-3 rose 17.3 billion this week, and the Fed has now pumped 115.0 billion in liquidity into the system since November 15th. The bulk of that was added in the past five weeks, up 71.3 billion for an annualized growth rate in fiat currency of nearly 8.0 percent. Does that sound like a Fed that is concerned about inflation? No, they are concerned about deflation. Our research indicates that whenever M-3 is boosted sharply, within a month or two equities rise. We saw that this week.

The trade-weighted U.S. Dollar is nearing the time when it will reach a significant bottom and rally up-down-up for the better part of a year. It has been declining hard since early 2002, for three years, and is due for a breather. The question at this point is, like from the child in the back seat, are we there yet? Well maybe, but we don't think so. Not just yet. Soon, but not yet. Some respected analysts have already called the bottom in the U.S. Dollar and they may be right. We are looking for one more push down, the final Minor degree wave 5 down to a primary degree (1) down.

Why do we expect one more thrust lower? We could count the last decline in December 2004 as the final fifth, but that last up-down move lacks proportionality with the entire Intermediate decline since May 2004. You don't always have to have proportionality of waves, but when in doubt, we like to see that. A second reason we think the Dollar has got one more test of 80 before bottoming is because the Minor degree wave 4 pattern in January 2005 looks strikingly like the Intermediate degree wave 4 pattern last March/April. The "c" wave does not have the impulsive look of a "three," which is what it should have if prices bottomed at 80.39 on December 31st. A third reason we think the Dollar should fall one more time is the MACD has lost upside momentum and the RSI has reached overbought levels seen at most tops the past twelve months. A fourth reason is the huge liquidity injection by the Fed recently. Too much Dollar supply.

Until the Dollar breaks out above the upper boundary of the long-term declining trend-channel, we will be skeptical of this rally. But once it does, the U.S. Dollar should retrace a Fibonacci percent of the 50 percent decline in its value since early 2000. Since the U.S. Dollar fell about 40 points, look for a rally to take it back to somewhere between 95 (.382) and 105 (.618).

Gold had a bad week and a lot of technical damage was done. But there was no knockout blow that would send Gold down hard. Still, as we start the next week, Gold finds itself dazed, against the ropes, and ready for the 10 count. Here's why: Last week's decline of 12 points blew up the Ascending Bullish Triangle pattern as prices broke out in the wrong direction. By doing so, prices suddenly find themselves on the bottom boundary line of the long-term, two and one-half year rising trend-channel. Prices cannot fall further from here or the intermediate trend has changed from up to down.

The Elliott Wave count we believe to be most accurate calls for an immediate rally next week to save the day. This rally should be the start of a final fifth of a fifth in Minor and Intermediate degrees. That should push prices above 450, although we lost our upside target with the demise of the Triangle pattern. What we do know is that Intermediate degree wave 1 extended, wave 3 cannot be the shortest, therefore this wave 5 up must be shorter than wave 3. That means the next rally has to be less than 60 points. Minor degree wave 4 down looks like an a-b-c-d-e pattern. But honestly, it also looks like a very nice 1-2-3-4-5 down impulse wave, something you might see in the start of a major corrective decline. Ouch. We'll remain Bullish unless prices fall decisively below the lower boundary of the rising trend-channel, or until the completion of Intermediate degree 5 of primary (1) up. Intermediate degree turns have all occurred on the trend-channel's boundary lines, so we are not necessarily going lower. Rather, Intermediate degree wave 4 may have had to kiss the line to signal the next thrust up. We'll know soon enough. Both the RSI and MACD look like they are bottoming.

Silver has traced out a fractal of an analog. I've identified each with Boxes A and B. It is as if we took a picture of the larger pattern and downsized it. Yet these two patterns occurred several months apart. Now there is absolutely no guarantee that another fractal will soon develop, but it is worth watching for another Parabolic Spike. This is an example of what makes the markets so fascinating and makes you think of God. How could millions of folks with variant objectives buy and sell Silver and have this occur? Amazing. This looks like a candidate for Robert R. Prechter's Beautiful Pictures book.

Oil. The next page shows two charts of Light Crude (courtesy of www.stockcharts.com). The top chart shows the Bullish scenario and the bottom the Bearish scenario. The Elliott Wave count in the top chart is looking for a final Intermediate degree wave 5 up before a correction that takes oil probably back down to the low thirties. That thrust up could take oil to $60 bbl.

However, there is a Bearish Head & Shoulders that made some nice progress this past week, and is looking like it wants to take oil lower. If oil suddenly drops below the neckline, below $41, then the downside target is $27 bbl. It is also possible for both scenarios to occur where a truncated fifth top fails to take oil much above 50 again, or maybe to 55, then prices decline sharply. The MACD has rolled over and momentum is now down. The key is the $40-$41 level. That's where the neckline and the lower boundary of then upward trend-channel intersect. If this support is broken, look for deflation in oil. It seems Bonds see this.

Again, as last week, this week Bond Prices broke higher as we expected per our Elliott Wave count. Last week we were calling for a Submicro degree wave {5} up to finish. The first three waves of {5} up look complete. Next week should bring a small down-up move to wrap up {5} of 3. The RSI is overbought, suggesting the need for some consolidation on its trek higher. The MACD is rising, implying Bonds want to move higher once the consolidation is complete, to finish its Minuette degree v of Minor degree c up of Intermediate degree wave 2 up correction, and set the stage for a major decline. The chart on the next page (courtesy of www.stockcharts.com) is instructive for the short-term progress we expect Minuette Degree wave v to take. There is a four month Bullish Head & Shoulders bottom that has formed that is textbook perfect, and was confirmed this week with the decisive thrust higher to 115.6. The Bullish pattern was formed by the price action of Minuette iii's top, Minuette iv's bottom, and the first three Micro degree waves of Minuette v. The minimum upside target from this pattern is around 118, which means Micro degree wave 5 and Minuette degree wave v are going to extend. For this sort of bullish price action to occur, one must speculate that equities are about to fall. It also means the robust growth and inflation risk rhetoric of the Federal Reserve is pure hogwash. Deflation is the real danger.

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.

Once Bond prices complete the five-wave impulse rally that will wrap up Minuette degree v of corrective Minor degree c of an a-b-c retrace, we expect the Trade Deficit and Dollar damage to catch up to Bond prices as they head lower hard and fast, fulfilling the larger Bearish Head & Shoulder's pattern's forecast. The only thing delaying this would be a massive deflationary Recession that it does appear Bonds are seeing. 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.

Instructive is the continued flattening of the yield curve. The Fed lifts the short end as long-end yields decline. This action projects an economic slowdown.

It looks as if the Gold Bugs Index ($HUI) is going to get caught in the downdraft of the general equity market slide now underway. There is a difference between Gold stocks and Gold the metal. The metal is above ground, supply certain and limited, and is a monetary store of value. The Gold stocks are managed companies subject to risks of any company - legal, regulatory, operational, managerial, production, research and development, resource availability and cost, etc... The bulk of its Gold inventory is underground, quantity and extraction uncertain. This puts the $HUI in the unique category of a hybrid, subject to occasional general equity market influence. Now is one of those times.

The first leg down inside the C wave down of a year long A-down, B-up, C-down corrective Intermediate degree wave 2 is complete, as is Minuette degree ii. Minuette degree iii down is now underway.

Based upon the Elliott Wave count, a 38.2 percent retrace of Intermediate degree wave 1's rally from 35.31 on November 16th, 2000 to 250.59 on January 6th, 2004 suggests a bottom from the current Intermediate degree wave 2 decline of 168.35. A 50 percent retrace takes prices to 142.95. A 61.8 percent retrace drives prices to 117.55 before the next major intermediate Bull run gets started. We favor the 38.2 percent or 50 percent retrace scenarios. The Bearish Head & Shoulders pattern was confirmed this week, increasing the odds that more downside is coming, with a minimum downside target driving prices to as low as 152ish. Interestingly, should Minor degree C end up equal to Minor degree A, that would suggest a bottom of 154, very near the H&S target. After the carnage, we should be at the bottom of Minor degree C of 2, to be followed by a powerful rally for several months or even years, Intermediate degree wave 3.

Bottom Line: The SPX/VIX Ratio sits right where it did two days before the top in late December, 2004. Could equities rise from here? Sure, but conservative wealth managers should heed the warnings that this market is at greater downside risk than upside potential. Caution remains warranted.

"That men may know from the rising of the sun
To the setting of the sun
That there is no one besides Me.
I am the Lord, and there is no other,
The One forming light and creating darkness,
Causing well-being and creating calamity;
I am the Lord who does all these."

Isaiah 45:6

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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.
7/30/04 15.27 90.12 120.10 267.00 391.7 6.56 43.80 9272.3 b
8/06/04 19.34 88.45 122.69 268.25 399.8 6.77 43.95 9267.9 b
8/13/04 17.98 87.97 123.68 269.19 401.2 6.62 46.58 9250.2 b
8/20/04 16.00 88.22 123.03 279.50 415.5 6.87 46.72 9261.9 b
8/27/04 14.74 89.80 120.20 275.00 405.4 6.58 43.18 9298.6 b
9/03/04 14.28 89.56 120.66 275.25 402.5 6.59 43.99 9288.7 b
9/10/04 13.75 88.60 122.61 272.50 403.8 6.16 42.81 9281.1 b
9/17/04 14.03 88.10 121.76 275.75 407.6 6.28 45.59 9275.7 b
9/24/04 14.28 88.59 122.57 278.50 409.7 6.42 48.08 9320.5 b
10/01/04 12.75 87.77 124.07 284.75 421.2 6.94 50.12 9336.5 b
10/08/04 15.08 87.55 124.13 287.60 424.5 7.29 53.31 9355.6 b
10/15/04 15.04 87.20 124.73 286.45 420.1 7.11 54.93 9320.8 b
10/22/04 15.28 85.97 126.46 287.00 425.6 7.33 55.17 9342.6 b
10/29/04 16.27 84.98 128.85 284.75 429.4 7.30 51.76 9359.9 b
11/05/04 13.84 83.89 129.46 283.00 434.3 7.50 49.61 9381.6 b
11/12/04 13.33 83.71 129.85 283.50 438.8 7.62 47.32 9374.3 b
11/19/04 13.50 83.32 130.13 287.25 447.0 7.60 48.44 9372.7 b
11/26/04 12.78 81.81 132.93 288.75 449.5 7.59 49.44 9391.0 b
12/03/04 12.96 80.98 134.53 284.75 456.0 7.99 42.54 9404.1 b
12/10/04 12.66 82.59 132.36 276.25 435.4 6.74 40.71 9414.8 b
12/17/04 11.95 82.20 132.90 285.25 442.9 6.80 46.28 9409.9 b
12/22/04 11.45 82.01 134.06 282.50 441.4 6.93 44.24 9416.4 b
1/07/05 13.49 83.72 130.62 279.25 419.5 6.44 45.43 9447.2 b
1/14/05 12.43 83.13 131.03 283.22 423.0 6.59 48.38 9433.0 b
1/21/05 14.36 83.34 130.60 281.85 426.9 6.81 48.53 9471.4 b
1/28/05 13.24 83.53 130.48 282.50 425.8 6.79 47.18 9487.7 b
2/04/05 11.21 84.25 128.79 281.00 415.9 6.63 46.48 -

Note: VIX Hits New Low; Dollar up; CRB, Gold, Silver & Crude Down

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