Well, the market as mentioned yesterday has decided to take the illogical high road to hell, so the analysis presented today presents an interesting possibility. The most important thing to address from this chart is the upper 55 day MA Bollinger band; it is well above the index and when it curls down, it could be in the process of forming a top. Short-term stochastics have the %K above the %D and has broken back into the rising wedge that it broke out of. We played the move from the lows around 1250 until recommending an exit around 1380 a few weeks ago, which was defined as “safety” based upon the potential patterns that emerged. Now with the S&P breaking to a new high, a very interesting probability has emerged which could see the S&P rally until March 2007.

Figure 1

Red lines on the right hand side represent Fibonacci price projections based upon upward trending wave price action projected off the subsequent lows. Areas of line overlap form Fib clusters, which indicate important support/resistance levels. All Fib areas on the way up have been “smashed”, so expect the S&P to continue going higher, actually much higher. As the Captain alluded to, the S&P is likely to make a double top that will have 12-18 months of subsequent pain, likely bottoming in early 2008. Moving averages are in bullish alignment (50 day MA above the 155 day MA above the 200 day MA), with the 155 and 200 day MA’s riding beside each other. The market is really going to collapse at some point in the next six months, but energy, and precious metal stocks should continue to do well. It is quickly being realized globally that the USA is NOT the center of the Universe and if they catch a cold, they could be simply quarantined from the global economy i.e. The rest of the globe will not catch a cold. If anything, Asian contagion is going to be the flu of the globe with the 1 trillion dollars that China possesses. Vietnam, China, India and other Asian countries (Russia included) all have red hot economies and millionaires and billionaires are emerging from out of nowhere. At some point, all the global money will create many millionaires, but it will be due to hyperinflation. In the end gold and silver will rule, so again, make sure bullion accounts for 10-20% of your net worth. Full stochastics below have the %K above the %D, each being tightly wound for the past two weeks. This translates into an extremely overbought scenario that could continue until the market has run its course. All we can do is wait for further market signals for when a top is in; right now the market is suggestive of further upside.

Figure 2

The weekly S&P 500 Index chart is shown below, with Fib time extensions of the decline shown on the right hand side and Fib price retracements if the decline shown on the right hand side. Notice how the S&P has moved within Fib channels since late 2004. Every time the S&P has broken to a higher Fib channel, it has been back tested before advancing (this happened recently with the S&P declining to 1360ish). The S&P has been moving up in a channel since 2004 (often called a bear flag), while the full stochastics have been forming a gentle negative divergence. WELL, the S&P broke above the bear flag and the %K broke above the declining stochastics channel. This is a rare bear flag negative divergence channel breakout, which has bullish implications. The upper 21 week MA Bollinger band is higher than the 55 week MA BB; usually tops in the S&P occur with the 55 week MA BB above the 21 week MA BB. As such, there is a good chance those shorting the market are going to be directly responsible for propelling the S&P to higher highs over the next 2-6 months (I give a wide margin for time, because the market signals could change on a dime).

Figure 3

The mid-term Elliott Wave chart of the S&P 500 Index is shown below. Last week I commented that the lower parabolic trend line of the upward move was pierced and the move was likely over. Well, surprise surprise, the market has embarked on an upward trend that likely has anywhere from 2-6 months of further upside. The sideways move labeled as X could in fact be a subwave of X, but for now I am assuming that wave Y is underway. For time symmetry, wave Y would have to last approximately three months, or till late February 2007. The purple trend line drawn is the new support line for now, so as we have mentioned the past four months, do not short the market.

Figure 4

The long-term Elliott Wave chart of the S&P 500 Index is shown below. I copied the image of the area shown in brown was copied and superimposed to the right of the current move. The move I have labeled as a symmetrical (a nine-legged pattern), but it may be a (W)-(X) (which is a diametric (bowtie formation)-(Y) which currently is in progress. If the current move up is going to have symmetry with the March 2003 move until early 2004 top, then the current move up will put in a slightly higher high above the 1548 top from 2000 at some point in February-March 2007. Subsequent to this top, I would expect a decline back to the 1200 area by mid to late 2007. Pension fund companies are going to be forced to look for massive returns, due to the large amounts of capital that will be lost. As such, by mid-2007 when gold and silver stocks have rocketed ahead, mutual funds will be attempting to enter quietly. Unfortunately for them the large correction in the HUI is nearly over and any positions they take in 2007 will be on minor dips (unlike the 30-40% downside swings seen the past 10 months). The overlap blurs the current move up, but is does illustrate the powerful move up since August does have a striking similarity. I rarely like to overlap charts for comparison, because every time is different. This one instance however, the move is part of a larger Degree structure and structures do allow for symmetry. As such be prepared for a lot of volatility during the coming months.

Figure 5

Currently there are 32-33 precious metal companies and 15 energy stocks we are tracking. Approximately 30-35 articles are posted per month on our site, ranging from 700-2000 words, based upon the nature of the articles. I cover the AMEX Gold BUGS Index, AMEX Oil Index, US Dollar Index, 10-Year US Treasury Index and S&P 500 Index. Captain Hook, the site proprietor posts articles on similar markets, but with a macroeconomics slant. I will not be updating the HUI for sometime, as the projections made the last six months have held true (the exact breakout time will be kept for subscribers). I hope this update provides a reason not to attempt shorting the market during the next 3-6 months and instead focus on the stealth bull market in the precious metals which soon will be entering wave [3].III or [1].III. Elliott Wave analysis is one of the most precise market timing tools I am aware of, that when executed properly can identify critical turning points in markets. Preferred and alternate counts should suggested to be used in conjunction, so that sudden changes in the rhythm of the market can be identified and acted upon. For those unfamiliar with my methodology of analysis, I refer you to the following thread: http://www.financialsense.com/fsu/editorials/petch/2006/0901.html

© 2006 David Petch
Editorial Archive

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