Right now, markets are extremely choppy, with the correction in gold stocks, particularly the HUI correcting back to the 490-500 area. From a quick glance of charts, the S&P 500 index and XOI remain in definitive uptrends, while the HUI has pulled back. There is really no change in the technical picture at present...the bubble the FED blew is still growing and will continue to expand until the surface tension of the bubble exceeds the capacity to remain intact and then it will burst. Energy prices are still set to rise, which in turn will raise the cost of every item transported and drive up precious metals. We are in the last two years of the current government term in the US and historically, they have been favourable to the stock markets. Beyond the last half of 2012 and into 2014, things are going to get really ugly. Another deflationary scare will likely occur during this period which will bring down most commodities and markets. After 2014, interest rates are likely to soar as bond holders are going to demand a higher rate of return when it becomes obvious that inflation is well above the stated levels.
Climbing the “Wall of Worry” is in effect at present and as the Captain has stated the past few months, speculative positions should be groomed back, with core positions held across a number of different economic sectors. Those trading stocks, ETF's or funds equivalent to the Horizon Beta funds...keep stops in place to preserve profits or reduce risk.
Analysis today will highlight how other currencies are doing relative to the USD and the direction the USD faces in the short term...nothing has really changed since the prior update.
Currencies
The daily chart of the Canadian dollar index is shown below, with all three upper Bollinger bands in close proximity to each other at present. Lower Bollinger bands are still tracking sideways, indicating that no sharp downturn in the Canadian dollar should be expected anytime soon. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K above the %D in all three instances. The trend in the Canadian dollar is likely to remain sideways to up for the next 7-10 trading days.
Figure 1
The weekly chart of the Australian dollar index is shown below, with all three upper Bollinger bands above the index, indicating a top was put in place. The lower 21 MA Bollinger bands is in close proximity to the index, suggestive that further downside potential exists. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K beneath the %D in 1 and above the %D in 2 and 3. The %K in stochastic 2 curled down, so expect sideways to downward price action with the Aussie dollar over the course of the next 7-10 trading days.
Figure 2
The daily chart of the Euro index is shown below, with the lower 21 and 34 MA Bollinger bands in close proximity to each other and below the index, suggestive that a potential bottom was put in place. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K beneath the %D in 1 and 2 and above the %D in 3.The Euro corrected for two months and appears set to rally. With the %K in stochastics 1 and 2 curling up, strength in the Euro is likely to persist for the next 3-4 weeks. Of course a major piece of news could reverse the technical setup, but for now, the trend appears to be sideways to up.
Figure 3
US Dollar Index
The daily chart of the US dollar index is shown below, with the upper 21 and 34 MA Bollinger bands in close proximity to each other. Lower 21 and 34 MA Bollinger bands are in close proximity to each other and the closing price, suggestive that further downside potential exists. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K above the %D in 1 and 3 and beneath the %D in 2. The %K in stochastic 1 appears to be rolling over and when it falls beneath the %D, expect downside potential to last for at least 2-3 weeks before basing.
Figure 4
The weekly chart of the USD index is shown below, with upper 34 and 55 M A Bollinger bands above the index, suggestive that the correction from last year's top is not yet complete. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K above the %D in 1 and beneath the %D in 2 and 3. The %K beneath the %D in stochastic 3 generally completes an oscillation from top to bottom before basing; so with this observation in mind, the appearance of strength at present should be viewed with caution until 81.5 is taken out. The daily chart indicates weakness over the next 2-3 weeks, while the weekly chart suggests strength (that should be viewed with caution).
Figure 5
The monthly chart of the USD index is shown below, with Bollinger bands no indicating any particular trend at the moment. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K beneath the %D in stochastic 1 and above the %D in 2 and 3. The %K in stochastic 1 falling beneath the D and the %K hugging the %D in stochastic 2 indicates longer-term weakness in the USD. Refer to Figures 7 and 8 for the Elliott Wave counts, as they provide clues for how the pattern “should” behave, given the recent wave structures.
Figure 6
Image cannot be displayed
The short-term Elliott Wave count of the USD index is shown below, with wave B shown to be underway at present. It is possible that wave C has begun an impulsive sequence down to the 72-74 area but before this can be confirmed, two closes beneath 78.5 is required and as of this AM, the USD is at 78.771. If we do get a break below this, those wishing for a quick trade might consider purchases in the precious metals sector for a 10-20% return over the next 3-4 weeks. Once the USD bottoms around 72-74, it stands to rally for at least 4-6 months, which should send markets and commodities into a decline until Septemberish. At this point, a very sharp move in commodities is expected, with gold likely being catapulted to over 00/ounce. Gold still will have at least a triple beyond this point, but the top of 2012 will represent at that point in time the first year of gold being lower than a previous year. Watch the USD carefully this week because the trade is on with a break below 78.5...this represents the line in the sand and based upon the Elliott Wave count, it is baked in the cake. Wave A was clearly impulsive, so it requires another impulsive segment to satisfy the count.
Figure 7
The mid-term Elliott Wave count of the USD index is shown below, with wave [D].b thought to be forming still. Once wave C.[D] completes, wave [E] is required (upward trend) to complete this large structure that has been forming since 2008. After wave [E] completes, the USD stands to have a sharp move down to the 63-65 level at a minimum. Companies here in Canada had better make sure appropriate currency hedges are in place for later this fall/early 2012 because there could be severe financial losses and business failures.
Figure 8
In short, expect the USD to remain weak and if the 78.5 level is taken out, then the move to 72-74 is baked in the cake. During this time, precious metals, energy and the broad stock market indices should rise higher due to currency depreciation and increased demand as people play the inflation trade. This is expected to last until mid to late February as the Captain has described (referring this to a similar pattern as to the year 2000). Positions SHOULD be parred back after this time frame, as the correction is likely to be somewhere between 15-20%. This is minor compared to what lies ahead after the expected huge rally later in 2011/early 2012 (another 40-50% correction).
That is all for today. I will be back tomorrow AM with an update of the S&P 500 index.
David Petch
January 18th, 2011
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