Big Bubbles and Little Bubbles

Big Bubbles and Little Bubbles

David Petch

Anyone with children or a good long-term memory can remember the process of blowing bubbles. A small breath of air creates a small bubble and a large breath of air creates a large bubble. The wind can carry bubbles far if it is a good gust. When the bubbles burst, the larger ones have more debris. The surface a bubble is charged, so they can join with other bubbles to form larger complexes. Bubbles high in the air with no physical barriers can travel far. A physical barrier can quickly act as a roadblock and the bubble bursts. Even if a bubble is in a large open space, the surface tension of the bubble with reach a critical point where the integrity is challenged and it bursts. Bubbles will usually burst with little warning.

The above accurately describes the current financial scenario we are in globally. The key item to examine for physical barriers will be the oil supply. Based upon government oil supply figures, oil reserves are increasing to meet the required demand. As Iraqi oil continues to come online, prices should stabilize between now and later in 2005. Non-OPEC nations are expected to deliver an additional 2.1 million barrels per day during the 2004-2005 period. Oil consumption in the US is expected to increase 260,000 barrels/day (bpd) this year and an additional 370,000 barrels per day in 2005.

On May 7th, industrial crude inventory levels rose to 300 million barrels, a level not seen since August 2002. Crude oil prices generally top out in May, and fall throughout the summer as US inventories use a lot more crude oil to maximize gasoline production. http://www.eia.doe.gov This is an excellent web site to track gas inventories in the US. There is a lot of information so take time in viewing.

http://www.eia.doe.gov/oiaf/aeo/gas.html This thread is from the same site. A breakdown of expected declines in oil, natural gas production until 2025. There is no use regurgitating the information, so it is the reader's discretion to visit this site.

The USD, HUI, S&P and TNX are covered in this update. The XOI, XNG and commodities will be updated later on tonight.

US Dollar Index

The Bollinger bands are in a setup for a decline, with the upper BB's still rising. The full stochastics below are nearing a possible crossover, so watch for the %K to drop significantly below the %D line.

Figure 1

The 50 day MA crossed above the 200 day MA. The 200 day MA has a good chance for crossing underneath the 50 day MA, which would be supportive. The short-term stochastics below have had upper and lower line curved patterns fit the pattern. Currently the stochastics indicate the USD is in a decline phase.

Figure 2

Below is the weekly USD index. Notice the long negative divergence with the full stochastics that occurred prior to the USD top and subsequent decline. The full stochastics recently crossed over, so the trend appears to be bullish in the longer term trend, unless we get a good reversal. The 21 and 34 MA recently converged, suggestive of an upward move. These formations do not generally occur for declines when this far below the cash index. Also the lower BB's all curled up, suggestive 84.56 was a significant bottom.

Figure 3

Here is another look at the weekly chart, with shorter-term stochastics. We likely have put a top in, or close to it and should have a decline to 86-87 prior to the next leg up.

Figure 4

Below is the Elliott Wave count of the US dollar Index. The current leg down has a bull flag, suggestive a rebound in the decline is due. The wave (A) or (W) completed one leg of the pattern, and the decline in wave (B) or (X) is the current phase. The depth of the decline is likely to extend to 86-87, but I stress "CORRECTIVE PATTERNS CAN BE VERY COMPLEX, AND MORPH INTO PRACTICALLY ANYTHING. A break of 89 will confirm the lower trend-line of the prior wave was broken and accurately labeled (post pattern confirmation).

Figure 5

AMEX Gold BUGS Index (HUI)

The HUI in this chart has the upper and lower a BB's curling down and up, respectively. This is suggestive of a bottom. The full stochastics confirm this, with a low reading and a near bullish crossover of the %K above the %D. Refer to the Elliott wave chart, because the current wave up is suggestive of further decline, unless 203 is taken out.

Figure 6

To add to the bearish position, the 200 day MA slipped beneath the 50 day MA. The quicker stochastics shown below have gone parabolic, and suggestive of an up week. Be prepared for a top near 195-200, as the Captain pointed out weeks ago. Core positions should be held, along with stocks that one does not require money for paying off bills.

Figure 7

Below is the weekly HUI chart. The Bollinger bands are only at 112 and suggest that we are not going to see this index move into the next longer-term bullish wave up, until the lower 55 MA BB curls down. July is the expected bottom of the HUI. The stochastics shown below require penetration above the turquoise line to confirm a possible reversal in the corrective decline.

Figure 8

Below is the Elliott wave count of the HUI. The pattern has a possible wedge forming, which the preferred count is labeled as a triple zigzag. A move above 203 will nullify this count and the alternative presented in the next sentence, with upside to 240-250. An alternative count is that the wedge is a terminal impulse of a flat pattern. Both signify further downside, with a full retrace of the move up from a low near 163. I have altered the higher degree pattern, since the suggestive count structure is pointing to a big bounce off of the coming lows.

Figure 9

S&P 500 Index

Below shows the S&P cash index decline matching the full stochastics. The Bollinger bands are still in a corrective decline phase, matched with the full stochastics below. A bottom is nearing in the S&P, but we are not there yet.

Figure 10

The 200 day MA is currently support for the cash index here. The short-term stochastics below have a positive divergence to the declining cash index. Refer to the Elliott wave count of the S&P suggesting we have one final decline to 1060-1070 before advancing upward. We could have put a bottom in, but post pattern confirmation will be required.

Figure 11

The weekly S&P chart is shown below. The Bollinger band pattern is suggestive we are in a consolidation phase with the upper 55 MA BB curling down. The stochastics below show that the S&P decline could last another 2-3 months.

Figure 12

The Elliott wave count for the S&P 500 Index is shown below. We are currently in wave C.(4), with wave (5) down to follow. The former charts suggest that wave (5) could take up to one month for completion. The move up is a bearish flag pattern, confirming the count. A break to 1100 will indicate the bottom is in ending at a.(c ).[iv].C (actually [iv].C if 1100 is pieced), and we rally for 1-2 months.

Figure 13

10 Year US Treasury Bill Index (TNX)

The Bollinger bands are strongly suggestive a top has been put in, and we are going to have a decline lasting 2-3 months. The full stochastics are set to have the %K cross under the %D, supportive a top has been put in place.

Figure 14

The cash index here is well above the 3 MA's presented in the chart. The shorter-term stochastics have broken, suggestive the decline phase is already underway. A lower TNX will allow the housing and credit bubble to continue further into the future. Watch for a rebound in stocks like Lowes and Home Depot during the next 2-3 months.

Figure 15

Below is the weekly TNX. The stochastics below suggest the TNX could hover around current levels for 2-3 weeks before declining. The lower 21 and 34 MA BB's have not curled up, suggesting the bottom is 2-3 months out minimally.

Figure 16

Below is the Elliott wave count of the TNX. The pattern presented last week was a (W)-(X)-(Y), but best fits as shown below based upon the prior charts. I have not done the check today, but wave 1.(C ) is likely some Fibonacci relationship to wave 5.(C ). We should be up for a portion of the week, prior to the decline phase starting.

Figure 17

David Petch
Market Letters Digest
May 24, 2004

Treasure Chests is a market timing service specializing in value based position trading in the precious metals and equity markets, with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven to be very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested discovering more about how the strategies described above can enhance your wealth; please visit our web site at www.treasurechests.info.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions.