No Real Correlation's
David PetchThe indexes over the past number of years have sometimes developed correlation's that seemed to hold well until a critical point. People trading off of these could have their heads handed to them. The current environment has indices "flirting" with each other. Correlation's may hold for awhile, with the up moves of corrections and impulsive trends overlapping or visa versa, only to switch. It is best to examine each index as a separate entity to see where it lies within its trend. Take the US dollar and the HUI for example. There has been a strong inverse correlation for most of the HUI's advance. This is based upon gold being priced in USD (USD goes down, gold goes up). There have been times where gold and the USD have risen together.
The HUI and US dollar index are examined in detail here. I will examine more information tomorrow night. No update on other indices/commodities is required since major changes were observed.
The US Dollar should still be in an up trend for the next few weeks, pending upon how quick the move is.
The HUI is at a crossroads right now with respect to accurately labeling the current wave pattern. How the pattern emerges this week will dictate the longer-term trend. Refer to the charts for a more comprehensive explanation.
US Dollar Index
The Bollinger bands on the daily chart do not reveal much. The full stochastics are still in an up mode, so there is no confirmation yet that the trend is ending in this chart. A ribbon structure has been forming on the lower Bollinger bands, so the trend could continue upwards her
The 50-day moving average is acting as support. The 155 and 200 day moving averages are narrowing the gap with their distance to the cash index. A move for three closes above the 200-day MA would be a bullish sign. The index has heavy resistance now 1 ½ cents above the 89 cent level. The stochastics below have a lower trend line still intact, signaling more upside.
The weekly chart has the lower Bollinger bands beginning to roll out for the first time. One count possible on the Elliott wave charts is the move being complete from 120 down to 84.56. We will know what happens within the next few months. At junctures like this, many things can happen. The stochastics below show that the up trend is still intact, with a decline possibly up to two months away. This will be watched carefully.
The Gann fan line has the index a critical point. A break of the current grey trend line could imply the move down will begin to retrace itself. The Fibonacci retracements of the move down are shown on the right hand side. The minimal 38.2% retracement stands at 97.8. If the move down is done, then this level should be minimally hit at some point.
The current move up is uncertain. Either wave (a) or [w] of Y is underway. If the pattern has truly bottomed (not shown here) the labeling will require being lowered a few degrees as shown here. The anticipated pattern is a zigzag going up to 90-91 during the next few weeks.
The circled portion at the end of the chart shows the area of the pattern in question. We could still be in (4)., but a break of 91.5 will invalidate this and have 84.56 as the marked bottom. Waves  and  are of equal length, and this could have implications later on. Ninety represents psychological and technical resistance for the USD. A break of this will definitely be bullish, so care is required in examining how things transpire with the USD here.
The Bollinger band pattern here has the upper 55 MA BB "waving on the way down. This could be suggestive of further downside. Counter to this, the full stochastics had a bullish crossover recently. The lower 21 and 34 MA BB's place firm support for the index between 215 and 217. Consolidation appears to be the key here.
The 200 day MA is at 207, with suggests little downside here. The stochastics below are bearish, with 2-3 days remaining prior to the lower trend line being hit. A resumption of the upward trend would then be in effect. A wedge is forming with the stochastics, so a break of the upper trend line would be very bullish for the index as a whole.
The weekly chart Bollinger bands has a significant top being put in place, based upon the height of the 55 MA BB. Consolidation could be a lot longer than most anticipate based upon the spread between the 55 MA BB (294-88= 205 points). When the lower 55 MA BB begins to have a curled top form (as seen prior to the large move we had), then we can anticipate a major move. For now, we are probably going to see a large consolidation. The stochastics had a crossover, which is definitely somewhat bullish for the shorter term here. We could rally back up to 260 again without violating anything here, but my guess is we get a 2-3 week bounce prior to heading down hard.
Fibonacci circles are against the recent leg up in the HUI. The 50% time of the wave up has been violated. The next stop is the 61.8% time frame some time in early May. Notice that the retracement has held to 38.2% thus far.
Believe it or not, the recent wave pattern in the HUI changes things somewhat. There are a few possibilities which will be mentioned:
- The preferred count is that we completed a zigzag for wave [b].2 and are now heading down in an impulsive wave [c] to around 215-220.
- We completed wave Y.(4) and are heading up to complete wave (5) in a terminal impulse structure. Wave 1 was a 26 point move and is clearly corrective. The time sequence for the recent decline coupled to the depth of retracement to cause overlap with prior waves completely invalidates an impulsive wave classification.
- We are still in wave (4), with wave Y in wave [b] currently. A triangular structure is the most likely pattern to emerge here based upon the corrective pattern since December 2003.
- The pattern where (3) is could be a (5) indicating the end of the move. See the other Elliott wave chart for a better representation.
When multiple possibilities exist, it usually is a sign that the current move is half way through. This could be bullish or bearish, as pattern emulation (behaving like an impulsive or corrective pattern but actually the opposite) can not be ruled out.
This chart shows the old quandary…….where does wave (1) start. Both starting points are valid with the prior corrective move down. Until we see a break of the lower or upper trend line, we have to assume that the consolidation will continue.
I will update the S&P 500 and 10 year Treasury Index tomorrow night along with a brief update of the other markets/commodities.
Tuesday will be Commodity corner. Any more requests for items to be covered is always welcome. I can not put a chart of Palladium up due to errors from the data feed. Silver last time was ripe for a decline, but a short squeeze would cause a larger negative divergence to be corrected at some point.
Market Letters Digest
April 11, 2004
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