McHugh On The Markets - Print Version

M-3 is up 15.8 billion for the latest reporting week, however is actually down 14.7 billion over the past two months. This supports our view that equities are at great intermediate-term risk of declining as our research shows that whenever M-3 plateaus or declines for two months or more, equities subsequently decline.

The trade-weighted U.S. Dollar started its minor degree wave 4 up correction that we've been expecting. Proportionality suggests this wave 4 should take perhaps three weeks to a month before the final minor degree wave 5 takes the U.S. Dollar to final lows for a while. That low would also be intermediate degree wave 5 down of primary degree wave (1) down - the culmination of a multi-year long-term decline. A major reversal should then unfold - an A-B-C corrective primary degree wave (2) up that could take the better part of 2005 to complete. That rally should retrace a Fibonacci percentage of the wave (1) decline. Following that would come a calamitous decline - primary degree wave (3) that should take the U.S. Dollar to new all-time lows and push Gold to all-time highs.

The RSI has rebounded from deep oversold levels and the MACD has turned up. We'll be watching for completion of a minuette degree a-b-c correction to indicate that minor degree wave 4 is over and minor 5 is about to begin. The minor degree wave 4 retrace could take the Dollar up to as high as the 87 area should it want to retrace 61.8 percent of minor degree 3 down. Wave 4's usually don't retrace as much as wave 2's so it is possible that this rally will stop at the 38.2 or 50 percent retrace of minor degree 3 - around 84.50 to 85.75.

The chart on the next page (courtesy of www.stockcharts.com) shows an Elliott Wave count for Gold over the past three years. The sharp decline this week comes off the Rising Bearish Wedge pattern we've been showing for the past several weeks now, so is not unexpected. What is interesting is the speed at which prices are headed for oversold territory. Proportionality argues that once Gold is oversold, a minor degree wave 4 will be finished and one final push up to a final top in Gold for a while will be in place - minor degree 5 of intermediate degree wave 5 of primary degree wave (1).

An Ascending Triangle is still in play, and is one of the reasons we feel it is a bit early for a final primary degree wave (1) top at this time. 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. Maybe we get to 500 or maybe we don't before primary degree wave (2) starts, however prices still remain solidly inside their long-term rising trend channel and one more meaningful thrust higher over the next month or two would not surprise us. A decline below 375 would negate the Ascending Triangle pattern and indicate that primary degree wave (2) is underway. This correction could take the form of a zigzag and push prices sharply lower, or it could take the form of a "flat" sideways consolidation - perhaps even a symmetrical triangle - meaning the correction could be milder and not push Gold down more than 38.2 percent of the primary degree wave (1) rise, to about the 375 area.

The Gold Bugs Index ($HUI) charted on the next page has followed the path we expected from its mid-November top as outlined back in issue no. 97, November 5th, 2004, declining 34.58 points (13.9 percent) from its 248.18 high on November 17th to Friday's close. The HUI is in the last leg of an Elliott Wave minor degree consolidation - wave C that should take prices down below 180 over the next several months before turning back up in earnest. So far the HUI is finishing up a minuette degree wave i of v down. The RSI has predictably plummeted from a rare Head & Shoulders top formation to oversold levels, the place where minuette degree wave ii up can grab the baton for the next short-term path. The MACD also fell sharply from a Head & Shoulders top formation and momentum is now clearly down.

Silver crashed 18.4 percent over the past two weeks after completing its second parabolic spike pattern of the year.

In each instance, prices crashed after reaching its vertical apex. Interestingly, the first decline was stopped by a textbook Rounded Bullish Bottom pattern that evolved malignantly into the second parabolic spike. We warned about this possibility back in issue no. 94 on October 27th, 2004 (available in the archives at www.technicalindicatorindex.com). We stated, "What has to be watched here is the development of a parabolic spike, a near vertical ascension of prices. Once that occurs, we can expect a sharp vertical decline."

There is still a very good possibility that the Rounded Bullish Bottom pattern will reform itself once this crash is complete just as it did back in the spring and summer of 2004. What is happening here is Silver is being accumulated, but that its price got ahead of itself. We may continue to see a number of these ongoing parabolic spikes and crash-corrections as the Bull marches on - especially as the general public joins in the buying. Rounded Bullish Bottom patterns portend a significant - long term - rising trend. As long as prices do not break decisively below the rising trend-channel, this pattern remains intact. The RSI is now oversold. Momentum is clearly down.

"But as for you, Bethlehem Ephrathah, Too little to be among the clans of Judah, From you One will go forth for Me to be ruler in Israel, His goings forth are from long ago, From the days of eternity."

Micah 5:2

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Robert D. McHugh, Jr. Ph.D.
MAINRDMCH@aol.com
Main Line Investors, Inc.
www.technicalindicatorindex.com

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.