Talking Technicals
The Dow Jones Industrials, Gold, Oil and the US Dollar. I can't think of four market icons more talked about and examined then this little group. So I thought we would show a technical snap shot of each of these icons looking at them from conventional technical analysis, Elliott Wave and the Kondratieff cycle. We will look at each of them separately. This will be updated from time to time and posted at www.bullionfund.com the home page of the Millennium BullionFund*.
* David Chapman is a director of the Millennium BullionFund
Conventional Technical Analysis
For conventional technical analysis we are going to use two simple tools. They are a dual moving average and a slow stochastic.
The trend is determined as follows:
- the long-term trend is determined by the 50 period MA.
- the short-term trend is determined by the 20 period MA.
- the stochastic is used as a trend indicator and to detect potential divergences between price and the indicator.
Dow Jones Industrials
The major monthly trend is down. We are trading below both the 20 and 50 month moving average. The 20-month moving average has crossed under the 50 month moving average. The stochastic is confirming the major trend. The stochastic has fallen under 20 an area associated with oversold but it could remain that way for some time. There are no divergences in the monthly stochastic. We have a series of lower lows and lower highs following the top in January 2000. Monthly resistance on the moving averages is at 9600 and 10,000.
The major weekly trend is down. We are trading below both the 20 and 50 week moving average. The 20-week moving average has crossed firmly under the 50 week moving average. The stochastic is confirming the major trend but is diverging positively with an earlier low. We therefore could be near an intermediate bottom but it will not be confirmed until the weekly stochastic turns up. Weekly resistance on the moving averages is at 8770 and 9500.
Gold
The major monthly trend is up. We are trading above both the 20 and 50 month moving average. The 20-month moving average has crossed over the 50 month moving average. The stochastic is confirming the major trend but may be diverging with an earlier high. Monthly support on the moving averages is at $290 and $285.
The major weekly trend is up. We are trading above both the 20 and 50 week moving average. The 20-week moving average has crossed over the 50 week moving average. The stochastic is confirming the trend but may be diverging negatively with an earlier high. We therefore could be near an intermediate top. Weekly support on the moving averages is at $315 and $300. We are making a potential double top on the weekly charts that would be confirmed on a breakdown under $300 and target down to $270.
US Dollar Index
The major monthly trend is down. We are trading below both the 20 and 50 month moving average. The 20-month moving average is turning down but has not crossed the 50-month moving average. The stochastic is confirming the major trend and has no divergences and is not oversold. Monthly resistance on the moving averages is at 108 and 114.
The major weekly trend is down. We are trading below both the 20 and 50 month moving average. The 20-week moving average has crossed under the 50 week moving average. The stochastic is in an uptrend against the major trend, which is down. We have reached weekly resistance at the 20-week moving average an area that has coincided in the past with a resumption of the major trend, which is down. Weekly resistance on the moving averages is at 108 and 113.50.
Oil
The major monthly trend is up. We are trading above both the 20 and 50 month moving average. The 20-month moving average has crossed over the 50 month moving average. The stochastic is in an uptrend confirming the major trend. The stochastic is over 80 an area associated with overbought but it can remain that way for some time. There are potential negative divergences forming in the monthly stochastic with the highs seen in September 2000 but it is not as yet confirmed. Monthly support on the moving averages is at $25.50 and $24.25.
The major weekly trend is up. We are trading above both the 20 and 50 week moving average. The 20-week moving average has crossed firmly over the 50 week moving average. The stochastic is in an uptrend confirming the major trend. The stochastic is over 80 an area associated with overbought but it can remain that way for some time. There are potential negative divergences forming on the weekly stochastic with the earlier highs in May 2002 but it is not as yet confirmed until the weekly stochastic turns back down under 80. As a result there is some potential that we may be near an intermediate top. Weekly support on the moving averages is at $27.60 and $24.50.
Elliott Wave
R.N. Elliott wrote what became the Elliott Wave Theory in the 1930's although his definitive work was not written until 1946. Originally the theory was meant as a complement to Dow Theory. Today Elliott Wave Theory is widely used in technical analysis to study the market. It has been most popularized by Robert Prechter (www.elliottwave.com) who along with A.J. Frost wrote the Elliott Wave Principle in 1978. There are many other sites devoted to Elliott Wave analysis. As well there are a number of software programs available that analyze Elliott waves. For those interested in learning about Elliott Wave Theory the Prechter/Frost book is an excellent starting point.
Attempting to get into a lengthy discussion of Elliott wave theory is not the purpose of this short piece. Indeed while the basic principles of Elliott Wave Theory are quite simple the actual interpretation is quite complex even for the experts. As a result while it is interesting to know it is best left to the experts even though they often do not agree amongst themselves. Still many traders use Elliott Wave analysis to time the market.
In its simplicity Elliott Wave Theory is the study of mass behaviour as it swings from pessimism to optimism and back again in a sequence that creates measurable patterns. The markets are the best place to observe this behaviour where the changing psychology is seen in the form of price movements. The markets move up and down according the behaviour of the day and even the moment.
According to the studies of R.N. Elliott the markets move upward and downward in a specific structure. Up waves go up in fives with waves 1,2 and 3 in the direction of the market and waves 2 and 4 countertrend. Similarly markets correct in waves of three with the A and C wave in the direction of the move and the B wave countertrend. Waves can be applied over all time frames covering periods of hundreds of years to mere minutes. Elliott defined nine time frames as follows:
Sub-Minuette - minutes to hours
Minuette - hours to days
Minute - days to several weeks
Minor - a few weeks to a few months
Intermediate - a month or two to a year and half
Primary - a few months to a few years
Cycle - a couple of years to several years
Super Cycle - up to three decades
Grand Super Cycle - several decades and could span few centuries
According to Prechter the most recent Super Cycle completed with the top seen in the markets in 2000. Prechter also believes that the top in 2000 also culminated the end of a Grand Super Cycle that dated from the 1700's. Of course there are other Elliott Wave analysts that believe that the count is quite different and after this corrective phase is over we will move on to even higher highs. What none of the analysts disagree on is that the top in the markets seen in 2000 is significant and the corrective period we will be going through will last years if not upwards of a few decades.
Dow Jones Industrials
We have used the long wave count as originally devised by R.N. Elliott and Robert Prechter. This count has the last Super Cycle bottom at the lows in 1932 at the height of the Great Depression. This was labeled a Super Cycle low wave (IV). Since then according to Prechter we have seen 5 Cycle waves up labeled I, II, III, IV and V. These Cycle waves have been subdivided into primary waves (1), (2), (3), (4) and (5). Cycle wave V also signaled the end of Super Cycle wave (V). Prechter now say that this is the end of Grand Super Cycle wave ((III)). While the current corrective has only been going on now for the up to three years our best count is that we may have completed primary waves (A) and (B) of Cycle wave A. Indeed we may not have even completed Primary wave A as those waves we labeled on the weekly chart as (A) and (B) may only be Intermediate waves.
An alternative count to the Prechter wave structure has the top in 2000 being only the end of a primary wave (3). The current wave underway is primary wave (4) that will after a few years result in a move to even higher highs. I might add that there are other interpretations of the wave structure which both support Prechter and support alternative more bullish counts. Time of course will the deciding factor with the final count only determined in hindsight.
Gold
If there are disagreements about the where we are on the Elliott Wave with the Dow Jones Industrials there are equal and vociferous disagreements surrounding where we are on the wave count for gold. The chart we are using here is the nearest gold futures. Data goes back to 1974. Of course gold has been around and used as a money since ancient times dating back as far as the Bronze Age (3200-2300BC). We found a fascinating discussion of Elliott Waves back to ancient times at www.freebuck.com/articles/elliott by Joseph Miller, Daan Joubert and Marion Butler. Worth a peek.
For our purposes, however, we are only going to center on the period from the top in gold in 1980. For the bullish case a number of analysts see this as a top in September 1980 at $727 rather than the high seen in January 1980 at $875.This was seen as the end of a Cycle wave marked at 5 in blue. What we have been going through for the past twenty years or so is the corrective wave. The bullish case says it is over as we labeled in blue with the A wave bottoming in June 1982, the B wave topped out in a five wave ABCDE structure in February 1996 and the C wave culminated in July 1999 at $253.
An alternative bearish count has the high in gold in January 1980 at $875 labeled in red as Cycle wave 5. Again the A wave bottomed in June 1982 while the B wave topped out in December 1987. The C wave is still in play unfolding in a series labeled i, ii, iii, iv, with wave v to come. That means that the current wave still in play is wave iv and wave v to come will take us either to new lows or be flat or a failed v. wave. One might argue that wave v. is already in place as wave iv. was the October 1999 spike and wave v. was a double bottom wave low at $255 in April 2001.
Some, however, argue that the count we described above is more likely because of time and the corrective nature of abc patterns that have unfolded since the April 1999 low. But others argue that an impulse 1,2,3,4,5 wave began off that low. Again time will tell which scenario is right and again we may only determine the final outcome in hindsight.
US Dollar Index
The US Dollar Index topped in the 1970's. It has been in a major down trend ever since. The first cycle down wave A bottomed in 1980. The second wave or B wave topped in 1985 with Plaza Accord. The C wave or third wave down bottomed in September 1992. The D wave or fourth wave we believe topped out in July 2001 with an ABC primary wave up. We are now or should be in the throes of the E wave or fifth wave down. This could or should be a significant one as it will challenge the US dollar as a reserve currency much the same way the British Pound was challenged in the 1920's eventually losing its position as the world's reserve currency. We have no alternative wave structure on the US Dollar Index at this time.
Oil
Oil is somewhat more complex to get a grasp on from an Elliott Wave standpoint. Oil bottomed out in the early 1970's and topped out in 1980 with the onset of the Iran/Iraq war and the invasion of Afghanistan by the Russians. Since then oil appears to have undergone a series of corrective waves first bottoming in 1985 then an up wave that topped with the Gulf War in 1990 followed by another down wave that double bottomed with the 1985 low in December 1998. The nature of the waves since then appears to be once again corrective similar to what we saw when oil prices last spiked in 1990 at the time of the Gulf War. No five-wave structure suggestive of an Elliott impulse wave appears. So our best count may mean that the correction to the first impulse wave back in the 1970's is still unfolding. The A wave would be the bottom in 1985, a B wave top in 1990, a C wave low in 1998 and unfolding is a D wave that has not yet topped and could see new highs. This count implies that there could yet be an E wave that tests the lows seen in both 1985 and 1998 but does not necessarily have to exceed them. These would all be waves of a primary degree and the final E wave would end the cycle down wave.
Kondratieff Long Wave Cycle
Note: largely repeated from the Scoop's article of June 29, 2002.
Kondratieff long wave cycle (K-wave) was originally used to explain long wave economic cycles. Its originator Nickolai Kondratieff was a Russian economist (1892-1938) in Stalin's Agricultural Academy and Business Research Institute ("Long Waves in Economic Life" - originally published in German in 1926). Kondratieff's major premise was that capitalist economies displayed long wave cycles of boom and bust ranging between 50-60 years in duration. Kondratieff's study covered the period 1789 to 1926 and was centered on prices and interest rates.
Still Kondratieff may have been on to something. The 50-60 year cycle of catastrophe and renewal had been observed and recorded by the ancient Mayans of Central America and by the ancient Israelites. Further studies have discovered similar long economic waves from the period of the ancient Greeks and Romans.
Kondratieff identified four distinct phases the economy goes through. They are a period of inflationary growth, followed by stagflation, then deflationary growth and finally depression. Some characteristics are as follows:
Inflationary Growth (expansion): - stable to slow rising prices, low commodity prices, low and stable interest rates, rising stock prices. The period might also be characterized by strong and growing corporate profits and technological innovations.
Stagflation (recession): - rising prices, rising commodity prices, rising interest rates, stagnant to falling stock prices, stagnant profits and rising debt. This period usually sees a major war that contributes to the commodity and price inflation, and to the rising debt and misdirects business resources.
Deflationary Growth (plateau): - stable to falling prices, falling commodity prices, falling interest rates, sharply rising stock prices, profit growth but probably not as good as in the inflationary growth phase. Sharply rising debt. Possible period of considerable technological innovation. Excess debt contributes to speculative bubbles.
Depression (depression): - falling prices, stable commodity prices, stable interest rates although they may spike with a credit crunch, falling stock prices, falling profits, debt collapse and rising gold prices. As the stock market collapses numerous scandals will emerge. A major war occurs that helps contribute to end of the depression phase and the start of the new expansion period.
With four distinct phases in the K-wave a number of analysts have compared them to the seasons. Spring (inflationary growth, expansion), summer (stagflation, recession), autumn (deflationary growth, plateau) and winter (depression).
Our chart below summarizes the generally accepted phases since 1784 in the United States. We have noted the significant wars that accompanied the recession (price peak) and depression (trough) phase. We have also noted the tag name for the Autumn periods that were characterized by massive debt growth and speculative bubbles.
It is interesting to note that according to Kondratieff wave cycle we are entering the winter period. This also coincides with Elliott Wave Theory that we have entered what could be a long corrective period following completion of a Super Cycle wave and possibly a Grand Super Cycle wave. On that note we would like to leave you with one more cycle known as the Spengler Cycle.
Oswald Spengler (1880-1936) was a German philosopher whose treatise was "The Decline of the West". Spengler philosophized that civilizations rise and fall roughly over a 2000-year period (Spengler Year). The first civilization that rose and fell was the Neolithic Age that covered the rise of agriculture and the civilization of Sumner (7000 BC - 3200 BC). The Bronze Age saw the rise and fall of the Egyptian empire (3200 BC - 1500 BC). The Greco/Roman Empire followed this roughly from 1500 BC to 500 AD. The rise of Western Civilization began in the dark ages (spring 500-1000), rose through the Middle Ages culminating in the Renaissance (summer 1000-1500), and hits its zenith in the Industrial and Electronic Age (autumn 1500-2000?). Are we now entering the winter of the Spengler Seasons, the downside of Western Civilization to complete the Spengler Year?
There is some evidence that may be the case. The world is facing many problems including environmental (global warming?, endangered species and potential for mass extinctions, pollution of our air, oceans, lakes and rivers, destruction of the forests), demographic (overpopulation of third world countries, aging population in first world countries, growing sharp divide between the rich and poor as well as rich and poor countries), health (plagues, potentially incurable diseases) and political (rise of false prophets, despots, nationalism, terrorism and proliferation of weapons of mass destruction nuclear and biological).
The Kondratieff Cycle is a subset of the Spengler Seasons, as roughly 9 Kondratieff Cycles would make up a Spengler Season. A cycle analyst who follows and writes on Spengler and Kondratieff and many other cycles is P.Q. Wall (www.pqwall.com). We do live in interesting times.
October 10, 2002
Charts and technical commentary by David Chapman of Union Securities Ltd.
69 Yonge Street, Suite 600, Toronto, Ontario, M5E 1K3 (416) 604-0533, (416) 604-0557 (fax) 1-888-298-7405 (toll free) email david@davidchapman.com
The opinions, estimates and projections stated are those of David Chapman as of the date hereof and are subject to change without notice. David Chapman, as a registered representative of Union Securities Ltd. makes every effort to ensure that the contents have been compiled or derived from sources believed reliable and contain information and opinions, which are accurate and complete. Neither David Chapman nor Union Securities Ltd. take responsibility for errors or omissions which may be contained therein, nor accept responsibility for losses arising from any use or reliance on this report or its contents. Neither the information nor any opinion expressed constitutes a solicitation for the sale or purchase of securities. Union Securities Ltd. may act as a financial advisor and/or underwriter for certain of the corporations mentioned and may receive remuneration from them. David Chapman and Union Securities Ltd. and its respective officers or directors may acquire from time to time the securities mentioned herein as principal or agent. Union Securities Ltd. is an independent investment dealer and is a member of the Toronto Stock Exchange, the Canadian Venture Exchange, the Investment Dealers Association and the Canadian Investor Protection Fund.
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