Inter-Market Analysis of the US Dollar,
Gold BUGS Index, S&P 500, 10-Year Treasury,
Oil Index and Natural Gas Index
David Petch
Brief Commentary
There are 20 charts in this issue, so the commentary is brief. There have been significant developments in all of the above indices mentioned, which is why each one is covered this week. It seems the US government is getting itself into trouble as other countries contemplate buying oil in Euros. China and Russia both stated they plan on increasing their gold reserves from 5% to 10% backing. Soon here in Canada, our stupid government leaders will have sold all of our remaining gold reserves, while other currently less-fortunate countries accumulate gold. Gold usually goes where the money goes, so
Canada stands to have a less competitive currency. One thing Canada has going for it are the rich natural resources, which could in a discreet fashion help to cushion our dollar. The American currency if it ever were to return to a gold-backed dollar would probably not have any takers…..they went off the gold standard in 1971, and any attempt to go back on will just have disbelievers. The USD will become a much lesser currency in the coming decades. As Captain Hook (Mike) has pointed out, a deflationary collapse in a lot of paper assets could occur. To diversify ones investment portfolio, one should own some bullion (20-30% of ones portfolio with gold stocks and others making up the remaining percentages). The HUI stands to reach around 1700 in the next ten years, and a switch to buying physical items such as land, businesses and bullion should be pursued at that point while everyone later fights to get a position in gold stocks. Companies stand to rise to dramatically in the coming decade that stocks could split many times just to keep up with investment demand. Those just holding on to stocks during this run stand to make the most money due to compounding principles. Physical gold and silver bullion should be purchased in the coming 6-12 months if one is ever going to do it, as supplies are dwindling. It is best to take physical delivery and store it in vaults and to buy paper gold or silver. As supplies become tight, people may just receive cash for their holdings rather than the metal itself. The size of the global net worth of gold stocks is less than 1% of the net value of all US stocks. The lack of liquidity, severe shortages coming, declining mining production etc. etc. will be what drives prices to the moon. I firmly believe that this bull market in gold stocks will dwarf that of the Internet. The key is just staying in the market. However, the coming decline will probably be the sharpest in percentage terms compared to the entire run-up coming, so if one is sitting on declared losses, some profits may want to be realized to maximize on this, and reenter at lower prices on non-core gold stocks. Core positions in stocks should be held at all times, with only the more speculative ones sold off. The reason it is important to follow the Elliott wave patterns is to know when the top has been put in, whether it is the orthodox top, or the pattern top afterwards. Later issues will deal with what to do in the post-gold bull market as something to consider in the distant horizon.
US Dollar Index
The Bollinger bands are forming a ribbon pattern on the upper BB's, but notice the 55 MA has not even turned down yet (Figure 1). This is suggestive of more downside. The lower BB's suggest a steep decline coming up in order to align all three BB's in a tight sequence over the coming 2-3 weeks. The full stochastics are going very low on this cycle, with a large space between %K and %D, both suggestive of further downside for 1-2 months. Refer to Elliott Wave count for the placement of the pattern thus far.
Figure 1. Daily USD Index with Bollinger Bands and Full Stochastics.
Figure 2 shows the 50 day MA is still well below the 200 day MA, which is bearish. The moving average oscillator not only illustrates the downward trend, but also confirms the 50-day MA touching the price action of the index.
Figure 2. Daily USD Index with Moving Averages and Moving Average Oscillator.
Figure 3 shows the Elliott wave count of the USD index. Wave (2) of the current decline appears to have finished and now underway in wave (3). Due to the length of wave (1), it probably will be the extended wave. As EW has thousands of small rules, one I did no mention last week was that when wave (1) extends, wave (2) cannot retrace more than 38.2% of wave (1), as seen with wave (2)'s shallow retracement. The 90 level has significant resistance, but A LOT of key Fib support levels were taken out between 91 and 92. A drop to 90 will signal a quick decline to 84-86. A very significant rally in the US dollar index is expected after this decline coming up to at least fill in the gap denoted in the filled green oval. There should be a retrace of the wave 1.(3) this week to some extent prior to heading down lower. Based upon the two other charts, the USD index looks set to bottom in 203 months. There could be a lot of sideways struggle though around 90 for the next month. After that, a panic could set in quickly lowering the dollar.
Figure 3. Elliott Wave Count of the US Dollar Index.
US Dollar Index Bottom Line
The USD is going to be heading lower. Shorter-term oscillators etc. may be pointing up, but there is a lot of pressure based upon the pattern formation. Failure for wave (2) to even make it up to the 38.2% level suggests waves (3) and (5) will be shorter than wave (1). This is suggestive of a significant low coming up. After this the USD will probably rally back up to the 95 level and fill the gap. The coming 10-12 cent rally in the USD after its coming low should help carry the markets higher and the stock market as well. Gold pending its behaviour at this point should fall, as it is priced in USD, and the USD will be rising 10-12 cents (If gold gets to $500/ounce, then this would represent a $60 haircut).
AMEX Gold BUGS Index (HUI)
The HUI completed a rather shallow wave 4 with respect to time. The index has another 1-2 months of advancement prior to topping out, completing the entire move since 2001. The full stochastics have the %K bouncing off the %D, which is bullish. The upper B's have come together, and the lower BB's are getting set to form another ribbon (Figure 4).
Figure 4. Daily AMEX Gold BUGS Index (HUI) with Bollinger Bands and Full Stochastics.
The 50-day MA is still well above the 200 day MA< and the moving average oscillator is still pushing higher. Notice the fast line did not kiss off t he slower line, indicative of the strength of the trend of one higher degree.
Figure 5. Daily HUI with Moving Averages and Moving Average Oscillator.
Figure 6 shows the shorter term Elliott Wave count. I hope people have remained long on this index, as it whips around so much some shorter-term calls. Normally waves 2 and 4 of any degree will generally have a 1/3 time relationship (each wave should relate to one another minimally by 1/3 in time or price action), or in wave 2's case: 2 weeks. Wave 4 here only lasted 7 days, which was very short. Couple that, wave (iii).[1] was the subdivided wave and extended in time, and wave was extended in price. The chance of such an occurrence is 10% of the time. So, two variables like above put the pattern into a glitch, coupled with uncertainty in oscillators to give market direction. The trend now is clearly up, and to make a long story short, I am looking for 275-285 for a top in the HUI some time in late December/early January 2004. The green hollow oval show the expect area of retracement of wave [i] that has occurred thus far. We could get a running correction for wave [ii], but for now, we can assume some degree of retracement here. Failure for a retracement to at least the 38.2% area indicates the strength of the upward trend. The USD is slated to correct up this week, so the HUI probably will be down for a portion. The wave (2) to follow once this entire large move is done could retrace as low as 150-200, pending the strength of the move to come yet. It is suggested to buy more stocks once the low in the pattern gets there, and of course, removing highly speculative plays near the 275-285 area.
Figure 6. Shorter Term Elliott Wave Count for the Amex Gold BUGS Index (HUI).
Figure 7 shows the longer term Elliott Wave count. The shorter term EW count above showed the reasoning for the imprecise labeling the past two weeks on the HUI. This chart shows excellent alternation in construction between waves 2 and 4. The time of the structure in wave 4 was rather short, but meets the price requirement for being in the same degree as wave 2. The current move up has been on for 3 weeks, and we should retrace wave [I] somewhat to a range denoted with the hollow green oval. If wave [iii] is 161.8% of wave [I], and wave [v] is equivalent to wave [I], then a target of 275-285 is derived. It should be noted this is a rough estimate at the moment ant it could go higher, or hit the box of 235-264 as mentioned previously. Given the complexity of the global markets etc., anything is possible given the events we have all witnessed the past three years. The Bollinger bands on the HUI chart showed a short-term top in the wave pattern is in place, so chances are we go sideways for one week. Playing the decline after is up to ones tolerance for a decline, trading strategies etc. All I can say is that wave (2) should retrace 38.2-50% of wave (1) (the entire advance since 2000). If the HUI goes to 285, the pattern is an extended fifth wave, and the current wave since April should be retraced 61.8% MINIMALLY, or around 170. Wave (2) will probably be a running correction, so any decline will quickly be retraced by another wave followed by triangular consolidation (refer to prior issues for the WE ARE HERE chart on the HUI). Development of the top, wave height, ending structures etc. will provide more clues as the pattern progresses.
Figure 7. Longer Term Elliott Wave Count of the HUI.
Bottom Line on the HUI
We are in an up-trend at the moment, with a target of 275-285 pending how the thought pattern progresses. We minimally will hit the 235-264 box, but the absolute height will not be known until near completion of wave (iii).[v]. The decline to follow should retrace the entire move since 2000 to around 170, followed by a sharp turn around.
S&P 500 Index
Figure 8 below shows that the 38.2% level of retracement of the entire decline since 2000 was nearly reached. The lower Bollinger bands have merged with the set up for a decline. The full stochastics are in a narrow contracting channel, which should break down soon. We need to watch how the upper BB's perform this week, as a separation is indicative of the coming decline.
Figure 8. Daily S&P 500 Index with Bollinger Bands and Full Stochastics.
A break of the S&P 500 price below the 50 day MA, and a crossover of the fast line over the slower line on the moving average oscillator would be indicative of the decline being underway (Figure 9).
Figure 9. Daily S&P 500 Index With Moving Averages and Moving Average Oscillator.
Figure 10 shows the shorter term Elliott Wave chart. This chart was kept smaller, as no need to stretch the waves here (also better representation). We completed an impulsive wave down thus far, and should rebound in wave [ii] up to the different Fib areas shown on the right hand side. The first leg of completion of wave A should occur around 950. This chart last week showed completion of the terminal impulse, which signified the end of the move up from March 2003. Based upon how fast the markets move, time frames should not be considered short term. Price action is far more important at this scale.
Figure 10. Shorter Term Elliott Wave Count of the S&P 500 Index.
Figure 11 shows the longer term Elliott wave count. This chart shows the entire advance since April in the S&P. The current decline is underway and should have a bottom around 790-830, near March 2003. The longer the decline grinds down the longer it will take. We should decline to near 950 first, prior to a bounce, then another decline to 800ish. The longer term chart last week showed the sloping trend lines rising, suggestive we maintain the October 2002 lows, then head up to 1150-1200…around the time of the US Presidential election cycle. Wave [i].A had a contacting trend line, which is suggestive that we may hit the 61.8% retracement this week as shown in Figure 10. The longer-term trend at this point is downward with a high degree of confidence. No alternatives exist due to the early emergence of the decline we are starting. As the wave pattern becomes more complex, then alternatives appear.
Figure 11. Longer Term Elliott Wave Count of the S&P 500 Index.
Bottom Line for the S&P 500
The S&P is now in a confirmed downtrend with an initial decline to 950-960 expected. We should retrace up to 1000, followed by another decline taking the index down to 790-830 completing around March 2004. The bounce back up should carry the S&P to 1150-1250 prior to the heavy decline to 580-600.
Ten Year US Treasury Bill Index
The Bollinger bands are in a sideways consolidation right now prior to the next move up (Figure 12). The lower BB's are getting set to form another ribbon. The full stochastics are still deciding how things are going to develop, but the %K line is starting to curl up. The %D lines are forming a channel moving upwards….inflation is in the pipes.
Figure 12. Daily Ten Year US Treasury Index (TNX) with Bollinger Bands and Full Stochastics.
The 50 day MA is well below the 200 day MA, which is bullish (Figure 13). The moving average oscillator is in an uptrend currently. Inflation is not too far around the corner.
Figure 13. Ten Year US Treasury Index (TNX) With Moving Averages And Moving Average Oscillator.
Figure 14 shows the Elliott wave count of the TNX. The preferred count is shown in colour, and the alternate count is shown in grey. If the preferred count is correct, then the green line should be followed with the price dropping to 39 or lower. If the alternate count is to be correct, the decline should stop at 40ish, and move higher in wave 3. The pattern for wave 2 is a declining flat, which is starting to get into a complex structure. The wave (©[b] was re-labeled slightly ant the sub-minuette level to fit better with the rules.
Figure 14. Elliott Wave Analysis of the Ten Year Treasury Index (TNX).
Bottom Line for the TNX
The TNX is in a corrective phase still, but the pattern is suggesting a higher index cash price, which is suggestive of higher inflation rates. Paying off debt and not taking any more off is paramount, along with bullion ownership and select gold shares.
Oil Index (XOI)
The upper Bollinger bands have peaked, suggestive that this is a corrective move we are currently in. The full stochastics has the %K and %D in expanding channels. A possible crossover is looming with the XOI right now, suggestive of a decline to around 460 again. But…it could be in a bullish advance. Holding stocks for the longer-term trend is okay if one can handle a possible decline.
Figure 15. Daily Oil Index (XOI) with Bollinger Bands and Full Stochastics.
The 50 day MA is above the 200 day MA, which is bullish (Figure 16). The moving average oscillator has the faster moving line above the slower line., in a definite uptrend. Higher prices in oil stocks translate into higher oil prices.
Figure 16. Daily Oil Index (XOI) With Moving Averages and Moving Average Oscillator.
Figure 17 shows the Elliott wave analysis of the Oil Index (XOI). This pattern is at a crossroads with the preferred and alternate counts having near equal chances of occurrence. Although the high number of tough points in wave [iii] shown are there, which would suggest a corrective pattern, a running correction as shown as the preferred count would negate that. If the HUI breaks below 479, then the alternate count is correct. A decline stopping above 480 and then the trend moving up is suggestive of wave [iii]. For those wishing to enter positions, it is best to see how the above pattern plays out as suggested.
Figure 17.
Bottom Line for the XOI
The Oil index is still in a corrective sequence right now, with higher oil prices coming up. India and China are forces to reckon with, and as they grow, the limited global supply for oil will only drive prices higher.
Natural Gas Index (XNG)
The BB's are not really indicative of any trends, aside from a consolidation still underway. The full stochastics look like they are going to roll over, as suggested by the recent sharp decline. The longer-term trend is up, but still sideways for the next while. The %D lines are trending upwards, suggestive of underlying strength in the larger degree trend.
Figure 18. Daily Natural Gas Index (XNG) with Bollinger Bands and Full Stochastics.
The XNG is still under consolidation as shown in Figure 19. The index price is flirting with the 50 day MA. The 50-day MA is still well above the 200 day MA, which is bullish. The moving average oscillator is in a definitive uptrend. After the correction is complete, the next move up will be indicative of higher natural gas prices.
Figure 19. Daily Natural Gas Index (XNG) with Moving Averages and Moving Average Oscillator.
Figure 20 shows the Elliott Wave Analysis of the Natural Gas Index. Due to the volume of charts and time, this chart is briefer. Based upon the other two XNG charts and the wave pattern developing (megaphone type structure) it is suggestive that we have one more leg down in wave C.(2). There should be higher natural gas prices following, based upon the expected rise for the index. It is expected for the XNG to decline to 180ish as shown with the hollow green oval. A break above recent highs would negate this count, but the evidence is highly suggestive that a decline will occur here. The XOI may also have a similar decline coming, but again one is a global commodity and the other local, so both will behave differently. This should help one decide on future entry points or trading strategies.
Figure 20. Elliott Wave Analysis of the Natural Gas Index (XNG).
Hope everyone has a great week and happy investing.
( As posted previously two weeks ago at www.treasurechests.info )
David Petch
Market Letters Digest
Volume 1, Issue 17
November 11, 2003
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