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What to Expect in 2004
David Petch
This article will attempt to discuss what the charts are suggesting will occur in 2004. Some of the charts are one week old, but are projecting the longer term Elliott wave counts for the markets progression. One problem when analyzing longer term Elliott wave patterns is the increase in the possibilities a pattern may be labeled. There is more variability due to the shear size and magnitude of waves. This is why indicators such as Bollinger bands and full stochastics I find are crucial for helping to "gauge" the length of a wave, and when tops occur. Right now is a point in history where economic cycles have never gone before. We have the US economy with people in debt from the average Joe to the State run governments and the US government itself, with a decreasing dollar and rising stock markets. The printing presses are running full tilt, allowing the excess liquidity to be picked up in the stock market. The fiat presses of the world are generating billions of dollars per week, while only 2500 tonnes of gold is brought to the surface each year. Assuming there has been 120,000 tonnes mined since the dawn of time, then $426/ounce*120,000 tonnes*2204 lbs/tonne*16oz/tonne = 1.8 trillion dollars. This is the net worth of all the gold ever mined. Mining stocks total between 110-130 billion dollars. This is a very small market, and the silver market is even smaller. The bear market the precious metals were in drove prices in most cases to below production costs. This has created a real lag in exploration and new mines. As the global demand for gold increases, it will be hard for the supply to keep pace with the demand. We will probably have a supply deficit at some point, which will drive metal prices much higher. When the coming interest rate cycle starts, this will have a negative impact on primary metal produces (copper, zinc, lead, nickel etc.). Approximately 70% of silver brought to the surface is a byproduct of primary metal producers…. so at some point there could be a real shortfall if current silver prices persist.

It appears the stock market indices are in the fifth wave of the bull market since 1982 (See the S&P analysis below). As hard as this seems to fathom, the charts presented do provide proof that this is plausible. Participation at this stage for most is being driven by Allen Greenspan trying to generate inflation in a current larger deflationary trend. If the DOW does go to 12,000 or higher, one is damned if they do not participate and damned if they do. Since precious metals are emerging from a bear market that started in 1980, there is the opportunity for greater money to be made in this arena. One should note though that the corrections associated with gold stocks are sharp and violent……..not for the faint of heart. My philosophy on investing is to accumulate positions early in this bull market in gold/silver stocks and bullion, holding them to a later phase in the cycle or at time points where a very important top lies. Timing turning points and the depth of their corrections is difficult to get 100% of the time. From an income tax perspective, the longer one can hold off on selling stocks, the greater the potential profits unless one has stock market losses to curve the taxes.

We have had a hard time with the S&P count for the last few months, because it was extending beyond allowable Fibonacci time extensions within the flat pattern we were tracking in anticipation of a leg down. When we did the S&P/USD ratio however back in mid-December, the count was crystal clear. The S&P 500 Index placed in a running correction for wave 2 with a non-limiting running triangle for wave [y]. This is very bullish, and if anyone is short the S&P right now, I would play it very cautious since the put/call ratio is quite high. What is finally emerging from a hazy fog is a scenario of short term inflation rates that will rise to levels that are unquantifiable….I do not mean we have interest rates 1982 style……but I can not gauge how high they will rise…….just they will and are brewing like a volcano about to blow its top. The Federal Reserve and other countries can print money to try and control the currency markets, but with trillions being exchanged globally between merchants, hits of money are quickly diluted in the sea of money transactions. This printing of money is by definition inflation and this in turn will flow to all ebbs of items with a dollar value attached to it. So, if the DOW gets to 12,000 or more, it probably will be worth in relative terms what is was at 11,700 due to the extra amount of money printed in the system. I would avoid the stock markets (S&P, DOW), as this is representative of the final fifth wave since 1982. I have only studied the S&P since 1999, so I am basing my count on the current structure that I have seen. Glancing at a longer-term chart, there was a running triangle forming from 1987ish to 1992t, so I believe that was wave [2] and we just finished wave [4] in October 2002 (wave [3] from 1992-2000). How long will the markets go up?? Good question. Things are deteriorating fast, and I would tend to trust price objectives rather than time. I estimate the upside of the markets is a minimum of 6-8 months with increased volatility.

Below are analysis of the HUI, S&P 500 and XOI. It should be pointed out we are in wave (4) of the HUI right now and has pretty much followed our proposed pattern albeit it went lower and longer than initially thought. As of tonight, the HUI appears to be nearing the end of this fourth wave. The HUI impulsive moves up so far have tended for equivalency with the preceding correction. If this wave (4) is two months, then we could assume the move up should minimally be two to three months (May top at the latest). This will conclude a termination to the HUI advance from 35 or 60 (pending how one labels it). The correction that ensues could retrace 38.2% to 50% of that move, so something to be aware of. The HUI does have a final leg up, and I minimally expect it to be 90 points to the upside from current levels or 300. The XOI had a massive corrective wave structure end in May 2003 that started way back in 1998. The XOI/USD ratio only has recently broke out. So, on this basis, there is a high probability based upon the Elliott wave count that the XOI could be bullish for 1 to 1 ½ years. When oil prices get high, that usually spells the end of the economy, based on historical data, so that gives the stock market until early 2005 I believe to put a top in (S&P, DOW).

Gold BUGS Index (HUI)

The Bollinger bands have had the lower 21 and 34 MA lines merge near the base of the decline, implying further downside. The full stochastics are indicative of a further decline since the %K line decisively turned south of the %D line.

Figure 1

The cash index is below the 50-day MA, with 155 and 200 day MA slowly creeping up. Another form of stochastic below shows another wave up is about to commence, but there is likely a chance of further downside prior to that event.

Figure 2

The Elliott wave pattern here is strongly suggestive of a move down to at least 220 prior to completing the wave [c]. The alternate count is that we are done, shown in circled gray. Wave A will complete a flat, so there is a high probability that wave B will be a zigzag (5-3-5) all the way back up to the highs of this pattern, with a final impulse down to 220-230 again. This is based upon the USD pattern (why I spent so long doing the analysis the other day) so we could be backing and filling for another month yet.

Figure 3

S&P 500 Index

The upper Bollinger bands are well extended above the index, suggestive a correction is not looming far off. The full stochastics are nearing a crossover point, suggestive of downside ahead.

Figure 4

Talk about conflicting signals. The stochastic below shows we could expect one more uptick possibly prior to the correction beginning, so if going short, watch carefully. The moving averages are still moving on up, but the cash index appears to be moving a little too high relative to the 200 day MA.

Figure 5

The pattern presented is the same as the last update, just more data. The pattern appears to have completed, and complete wave [i].3. We should expect a decline to retrace between 38.2 to 61.8% of the entire impulse. The 50 day MA is at 1080, so there is downside for around one month minimally.

Figure 6

The S&P/USD ratio is shown here to illustrate the true underlying pattern. The wave IV is clearly corrective in its development, while the wave V currently underway is clearly impulsive in its nature. The full stochastics have the %K and %D lines in up-trends-

Figure 7

XOI Index

The XOI has stubbornly gone up since the last update, albeit not much beyond the top called, and now based upon the other indicators, we are going to be heading down in wave [ii[.3 to the three Fib numbers shown on the right hand side of the chart. The rise wave very dramatic, and we should see a pullback here. It would be really sweet if when the correction in the XOI completes, the HUI tops out, allowing another investment opportunity for an 8-10 month period. There are no alternative counts here, based upon the simplicity of the count and how well it labels. Wave 2 was a failed flat. Some may mistakenly call it a running correction. A running correction requires the final point of say wave 2 to be above the completion point of wave 1. The XOI has a good shot of finishing above 800 this year, not much of a feat given where we are right now.

Figure 8


David Petch
Market Letters Digest
February 1, 2004

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