McHugh On The Markets

The trade-weighted U.S. Dollar remains on its track for a primary degree Elliott Wave (1) bottom. It is in the latter stages of this quest, finishing off an intermediate degree wave 5 down of (1) down. Inside that wave, the Dollar has completed minuette degrees i through iv, and is wrapping up v down of minor degree 3. There should be a bit more decline followed by a small minor degree wave 4 rise and then one final descent to a bottom - minor degree 5 of intermediate degree 5 of Primary degree (1).

The entire decline to the primary degree (1) has hit our target of at least 82 as we projected back in June 2004 (see issue no. 61 in the archives of www.technicalindicatorindex.com) when the Dollar was trading at 89. We determined this from the Head & Shoulders Top pattern formed by intermediate degree Elliott Waves 4 and the first half of 5. This pattern confirmed with the decisive break below the neckline - below 87 - which increased the probability of the minimum downside target of 82 being reached. It is hard to say how much lower the Dollar will slide before a sustained rally occurs. The Elliott Wave counts suggests the decline is not over, and based upon common relationships between waves, a target of 80 - our next support area - is not out of the question. Prices remain inside the long-term downtrend.

After a bottom is reached, look for a pretty strong A-B-C rally inside primary degree wave (2) that retraces a Fibonacci percent of primary (1) down's carnage - either .382, .500, .618, or .786. It is a rally that could consume a huge chunk of 2005. Then an awful primary degree wave (3) down.

Here's the problem with a falling dollar. As the value of our currency declines - due to high budget and trade deficits, and too much printing press action - the appeal of holding U.S. dollar denominated assets by foreigners diminishes. The longer foreigners hold assets of a deteriorating currency, the lower the value of those assets. The risk here is that foreigners start dumping our financial assets.

Gold (see chart courtesy of www.stockcharts.com at the top of the next page) continued its rise to just under 450 this week, the power of the Bullish Ascending Triangle evident. This Bullish pattern is quite large and threatens to negate the smaller Bearish Rising Wedge pattern. That Wedge pattern's "throw-over" is moving further north than is normal, which means the Wedge pattern is close to breaking apart. We're not ready to declare the Bearish Wedge dead yet, but for it to be valid, prices need to decline from here. The Ascending Triangle projects an upside target of 500 before any significant correction. That target is arrived at by taking the distance of the widest part of the triangle and adding it to the spot of the breakout.

While Gold remains solidly inside its long-term rising trend-channel, there are some signs that a minor correction or breather is due. The RSI is overbought, as is the MACD, which looks like it is starting to curl over - a sign of slowing upside momentum.

The second chart on the next page shows that the HUI is in a long-term Bullish trend. The top Elliott Wave count we've been showing the past several weeks required prices to decline soon from here - a minor degree B top - and it appears they have. The count we believe to be most accurate has prices declining into a minor degree wave C down of corrective intermediate degree wave 2 down that would likely take prices to a Fibonacci retrace of intermediate degree wave 1 up. If wave 2 is a flat - which I suspect given the strength of minor degree wave B - then the decline should stop in the neighborhood of minor degree wave A down - around the 170 area - about a Fibonacci .382 correction. Should prices rise and exceed 258, then one of the alternate counts we presented in last week's issue is at play. One more up/down sequence to the 243 area would create a small H&S top for B.

If you would like to receive the full analysis of all major markets
including Equities, Bonds, and a special analysis this week
of Japan's Tokyo Nikkei, please visit www.technicaindicatorindex.com
and register to access our twice weekly reports.
We will make a best efforts to e-mail you
with alerts when the latest report is available.

"Be anxious for nothing, but in everything
by prayer and supplication with thanksgiving
let your requests be made known to God.
And the peace of God,
which surpasses all comprehension
shall guard your hearts and your minds in Christ Jesus."

Philippians 4:6, 7

Coming Soon: In early 2005, we will be introducing a new feature for those who are interested in trading. Trader's Corner will document options trades only available on our website at www.technicalindicatorindex.com. Subscribers can contemporaneously follow our purchases and sales based upon what we believe to be high probability trading opportunities in the markets.

Special Note: Be sure to register under the subscribers' section at www.technicalindicatorindex.com for e-mail notifications and password access of our new mid-week market analysis, usually available on either Tuesdays or Wednesdays. These midweek updates are only available via password access when posted on the web.

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com. The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.