Intermarket Analysis
HUI, US Dollar and S&P 500
with Geopolitical Analysis
This article discusses inter-market analysis between the US dollar index, Gold BUGS Index (HUI), and the S&P 500 Cash Index, with geopolitical analysis afterwards. The first three charts are Elliott-Wave based, and the last three are charts showing ADX, MACD, and Bollinger Bands of each mentioned above.
Gold BUGS Index (HUI)
The HUI as been in an upward move since November, 2001. The EW chart shows a large ascending triangle forming. The entire wave patterns since June, 2002 are corrective and this is the most logical count to currently explain this. The circled yellow wave pattern shows an elongated flat, which are mostly found within triangular structures. The wave pattern from November 2001 till June 2002 has the possibility of being labeled corrective or impulsive. If this is a corrective pattern, there could be a possibility that we could have a corrective pattern all the way up to the top in gold. Impulsive wave structures occur when an orderly process of market participation occurs. If we get a huge shift to hard assets, the process could be disorderly giving more of a corrective wave structure pattern. By keeping this pattern labeled as corrective, the ascending triangle would be classified as "non-limiting" meaning the next wave up after it breaks out of the triangular structure is not restricted in its advance by an amount equivalent to the largest leg of the triangle. If this pattern is correct, the move after will be explosive after we have one more rise, and fall back to the lower triangle trendline. The initial upward target for the HUI after completion of the ascending triangle is a minimum move up to 200. The five to ten year outlook would put a top in the index of 1700-2000.
The second HUI chart shows the MACD reaching a level nearly equivalent to the July 24, 2002 low. There appears a crossover is going to occur. The Bollinger Band (BB) pattern has had the stock price pierce the lower band, with a possible move coming to at least the middle BB. The ADX appears to be turning up, with the +DI and -DI changing directions. This chart supports the idea of a turn-around in the HUI.
Standard & Poors 500 Cash Index (S&P 500)
Since the S&P's top shown in July 2000, a complex correction has been developing. The first segment was a running expanding triangle, which bottomed on September 21, 2002 forming wave w. Wave x followed with a rally that peaked after three months, and went sideways for three more prior to dropping precipitously. We are currently in wave y, which is developing a double combination that could lead to a triple combination, pending the future severity of how low the market goes. The S&P has been forming what appears a descending non-limiting triangle since this time. It is important to note the HUI has an ascending triangle, which probably is a non-limiting type. This implies the S&P could rally to around the 900 level to complete the structure, prior to heading down significantly lower than the October 10, 2002 lows. Also on the chart are pink and flesh colored dots to show where the HUI topped out and bottomed out, respectively within its ascending non-limiting triangular structure. The HUI has nearly topped and bottomed at the same times as the S&P 500. The topping and bottoming at the same time further suggest that the different triangular structures for each index are being mapped out. The time frame for completion of wave (E) of [X] for the S&P is about one to three months from now. This also applies to the HUI. When the S&P declines, the HUI should also, but stop in the decline by support from it ascending triangles trendline. At this point both indexes should break into their true directions (HUI advancing, S&P declining) Also note the longer term black trend-line intersecting with the descending trend-line of the triangular structure. If the S&P can advance to this level, there is very heavy resistance from advancing beyond that point. The initial downward target after reaching 860-900 is the 650 cash level.
The second chart S&P shows the MACD having a positive divergence with the index while it has been going sideways the past seven months. The riding of the lower trend-line is suggestive of one final leg up. The +DI and -DI for the ADX are changing direction, which is suggestive also of another leg up.
US Dollar Cash Index (DX00Y, or $USD)
Since February 2002, the USD has carved out two impulsive waves down labeled as [1] or [A] and [3] or [B]. The post market action in the next six months will help determine which label best fits the wave structure of the Primary degree shown above. Wave [3] or [B] just terminated in the last few days, creating a textbook impulsive count down. Accurate structural labeling of all patterns requires examination of wave patterns at 10, 30 and 60-minute data intervals. This wave could turn out to be one leg of an impulsive leg down, which cannot be determined at this point. The bottom line the trend is down, and any moves up are merely corrective waves. The HUI tops and bottoms for its wave structures within its ascending triangle is represented with pink and flesh colored circles, respectively. The tops of the HUI appear to occur after a decline in the USD, and bottom in a timely manner with it. Since the switch from paperback assets (bonds, currencies, etc.) is underway, the USD is in a secular bear market, while gold and other commodities are in the transition to secular bull markets. The USD corrective bounce upwards should not reach beyond 104, probably half way up wave (3) of [3] or [C] at best. The long term bottom for the US dollar index over the next three to five years is 80-85.
The second USD chart shows two positive divergences' occurring while the market declined. The TBB is around 102. The USD could climb up to this level, prior to resumption in the downtrend. The +DI and -DI appear to be reversing direction, indicating a further bounce in the index at this point.
GeoPolitical Roundup
The US government has stated it currently is not concerned with a weaker dollar policy. This is suggested in the EW pattern having two clean impulsive waves, with a sideways consolidation between the two. The US government is however concerned over stock market valuations and the price of gold. Seventy five percent of all Asian central banks have their reserves in paper assets, mostly US T-bills. Within the total expansion of US paper, 42 % of T-bills, 26% of corporate bonds, and 13% of all equities are owned by foreigners. A stock market crash would cause people to abandon the US dollar in fears of further losses, and a rise in the price of gold (POG) would cause a feared shift into hard-backed assets. The attempt to hold the markets up, and suppress the POG is evident in both patterns descending and ascending triangles, respectively. No government is bigger than the market, and the market will always win……..Just a bit of a sideways fight can occur. When the break does occur, there will be no plugging the dike. The market manipulation has caused an upward floor on the HUI, and a downward floor on the S&P, but it is highly unlikely they can hold back the inevitable.
Currently, Japan is on the verge of collapse. Fourteen years after their market top, the government has been intervening in the stock market to prop it up, and taking over debt from banks. This has caused the Bank of Japan to have its assets in a very precarious position. Its central banks assets are equivalent to 25% of its countries GDP. Since deflation is running rampant in that country, a further fall in Real Estate or the stock market will undermine their asset value. A currency crisis will most likely erupt here, that will spread globally like a contagious flu. A collapse there would trigger a mass selling of their US assets in order to pay their own bills. This would trigger a snowball effect, which would implode the USD and its markets.
Gold and silver, most notably silver have been running deficits for the past ten years. Most of the above ground silver supply has been depleted, since it is an industrial metal and the low price has prevented most silver miners from increasing their production. Seventy percent of all silver currently supplied from mining is a direct result of it being a secondary by-product. This is not enough to meet current industry demands in the future, not to mention investment demand. Silver prices of $100-150/ounce and gold at $2000-4000/ounce five to ten years from now would not surprise me once the dust from everything has finally settled. The demand in gold is reflected in its price and that of gold/silver indices. Everyone thinks that the Iraqi war or the war on terrorism is the main factors for the POG increase. Little attention has been paid to the switch to hard-backed assets, or supply imbalances that have been created by a twenty two-year bear market in the metals.
So, what other factors could possibly trigger a stock market crash in the coming months? Our good ol' pension plans. Most companies in the 90's did not contribute to their pension plans, since the markets were providing returns of 30-40%. Now, practically every company on the S&P 500 has to infuse massive amounts of money to comply with legislation. There is already a move to remove pension plan requirements in the background by large corporations that are bankrupt, or would be driven there if they had to meet their pension funding obligations. American Airlines is trying to remove its requirement for supplying current pensioners with money……just let them get by on what is already in the pot. Companies like Ford have a debt to equity ratio of 21, and they are supposed to be able to fund their pensioners when vehicle sales are dropping off the charts?? There are numerous large corporations seeking to provide reduced amounts of money to pensioners to the pot does not run dry and everyone can have something left. This is leaving a lot of retirees out in the cold. A large brokerage firm recently announced their company would no longer match employee pension contributions. If pension plans are on the rocks right now, what will happen when the S&P goes to 600, or the DOW goes to 4000??
It is prudent for one to protect themselves against the coming ravages of the market. Hard assets are a best choice, with mutual funds in gold stocks. The USD, municipal, and corporate bonds should be avoided like the plaque. We are witnessing the revival of a secular bull market in gold and silver, and the start of a secular bear market in paper assets. Protect yourself and plan ahead.
Any comments or flames can be directed to dave@chartlook.com
David Petch
18 March 2003
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