Planet Yelnick

Fools Rush In (Where Triangles Fear to Tread)

Strong two-day rally makes the triangle re-emerge, but before betting on this, note that Neely still expects the fall and you must read today's STU: higher odds for a big drop than the triangle. Expect fast counter-trend rallies.  Neely did, and so this doesn't change his River; and the STU expects this brief run-up to fade.  If the triangle is on, we run up towards Dow13.7-13.9 and then back down to around 13.25.  But it also could mark the end of wave 1 down, and after a fast and furious wave 2 to Dow13.45-13.66, we crush through the August low at Dow12.5. 

Yen For Trouble

Watch currencies right now, not equities.  Euro seems to have finished its thrust out of a triangle, and dropped a lot (to $1.48) after closing in on $1.50.  The STU sees it on a path to $1.42 and below.   The Dollar Divergence in the past two weeks has become large.  While the Euro was surging, other currencies like the Canadian Loonie fell from $1.10 to $1.01, and the Oz$ (the Australian Dollar) from 95c to 87c.  These are large moves, and indicate a massive shift is underway, discussed below the fold. 

Long Weekend, Short Waves

Usually we should be cautious to draw too much from a short week like this with light trading.  Also, funds tend to lighten out of positions (especially short) pending a long weekend.  Then again, normally during these short weeks, markets rise.  Instead this one fell, and looks like it is about to show us its character: a final surge up, or a meltdown. 

Dow Theory bear signal, although just barely, and the Industrials have not yet breached the intraday low of August; the signal may be short-lived if the Dow bounces next week.  Euro thrust out of a triangle, closing in on $1.50 to the Dollar; but such thrusts tend to be fast and short.  Ten-year Treasury down to 4%, two-year below 3%, with strong momentum with the flight to quality in debt; yet the 4% level is a support level of sorts, and the reversal may come soon. 

The triangle count is still alive, but requires the Dow to bounce imminently.  The STU tonight dismissed what had been the alt count, a flat that would end slightly below the Aug low, since it would signal a major bottom, and yet technical indicators are too weak for that.  instead they think either the triangle (giving time for the technical indicators to solidify to support a bottom), or we are on the edge of a 3 of 3 down and the top is in.  Neely already believes the top is in (see the Danger! Danger! post).  For you crash-bugs, 55 days after the Oct 9-11 top would be the Dec 3-5 period. 

Seasonal Situation

Many have noted the seasonal pattern: sell in May, buy in Nov.  (In Silicon Valley, this used to be named after tech conferences: sell at H&Q, buy at Technologic.)  Few have analyzed it as well as Sy Harding.  His latest post says the buy signal has not yet occurred.  It usually comes on Oct 16, and is indicated by the MACD line crossing positive.  Currently it is still negative.  The longest this has delayed is into Dec10.  If the triangle holds, according to the STU look for a high around Dow13530 (D wave) and a low around Dow12250 (E wave).  If Sy's timing holds, look for a market rise next week on light trading, and then a final downtick in the first week or two of Dec. 

Triangle Tribulations

We appear to be in wave D of an ABCDE triangle.  The STU's target is in the Dow13.7-13.75K range, near the upper trendline and at fib retrace levels.  Its drop today is not unexpected; it looks like the b wave of a three-wave D (all waves in a triangle are corrective/three-wave in character).  It should not drop below yesterday's low - for convenience, below Dow13K.  If it does, this 4th wave will break as an irregular flat (or worse) not a triangle.  How to guage this today?  Bad news is the Naz 100 has fallen in a clear five-wave impulse.  Harbinger of the Dow?  Unclear.  In any event, the corrective action seems destined to continue into Dec, and maybe into the new year. 

The Dollar shows some signs of life, and it may be more than a dead cat: the jump in the last few trading days broke as five waves, and the fade in the last day or so is breaking as three waves.  Watch the Euro falling as a signal of a stronger Dollar Rally.  Meow!   

Danger! Danger!

Neely has posted his SECOND WARNING: that the S&P will NOT retrace this decline.  Worth paying attention to - when Prechter was expecting the bounce of Oct02 to be short, Neely said the 2002 low would not be retraced.  It took Prechter a while to catch up to the last 5 years; Neely had called it right from the moment.  Now the two pundits diverge again - ironically, Prechter is more bullish!  His prime count still says a final wave 5 ahead.  The spot to watch is breaking the August low (Dow12.5K).  As skierwaver in the comments to the prior post  pointed out, the 78.6% retrace down (SP1415) will be an 'early' indicator that the August low will be breached - seldom does a retrace go beyond that level and stop short.

On the other hand, Yves has called the subprime crisis over, with financial stocks having fallen enough to match the toxic waste buried inside; and he is now bullish on financial stocks.  His calls since last March have been quite good - you can check them out here, here. and here.  Is the crisis over? 

Big Ben Chimes In

We bounced today off Dow13079, a little beyond the 61.8% level.  Close enough.  Good call by the STU.  Now we shall see if it goes back up, creating wave D of the running triangle, or fades in the next few trading sessions to test the August low.  The Dollar continues to be weak.  A wave D bounce is consistent with a continued Dollar meltdown, in this 'all markets together' market, except the Dollar.

The Dollar appeared to be strengthening overnight, but Bernanke's testimony today revealed he sees a weak Dollar as increasing exports, balancing the devastation of the building trade due to the housing meltdown.  Hence the continuance of propping the economy into the 2008 election.  This is sadly predictable in the last year of the four-year cycle.  What it signals: sell the Dollar!

We will now see increased pressure from France and elsewhere for the US to support the Dollar. Which way this breaks is unclear; Bush is very much an immovable object to foreign pressure, but Dollar weakness and a shift to the Euro may become the irresistable force. 

A running triangle fits when the market tries to wrangle a direction from opposing forces.  The wave pattern is telling us that we will continue to bumble in a trading range into the new year.    

Dollar Capitulation or Decapitation

STU gave a tight analysis today: 90/90 day down, but technical indicators do not yet show a bottom.  The 61.8% retrace is Dow13.16k (SP1465), a likely target that this market wants to now reach in a hurry.  That is also where leg A = C.  A bounce off that support level increases the odds that this is a running triangle, with a wave 5 yet to come. 

Dollar fell very sharply today - a huge move down.  Interesting, the bearish:bulllish sentiment bottomed - a few more Dollar Bulls have crept in.  This suggest a bounce is close.  Gold is in a blow off top as well.  This also suggest a sharp reversal is close at hand.  China hinted it was moving to a basket of currencies.  This sent shock waves through the system today.  But - they have leaked that before, in 2005, when we last speculated on a YE$ currency.  And the Dollar bounced.  And they continued to increase their Dollar reserves.

We may be coming to Dollargeddon, but not quite yet. 

Dollarific Boiling Frog

The Dollar Index is now in uncharted territory:  it was created in 1973, and has never been this low.  Fibonacciman has created possible fib levels around 76, or 71, but he notes they are just constructs off ratios (1.618 of prior move).  The Dollar seems poised to bounce, given so many on the negative side right now; but a small bounce will not save it.  A very scary analysis says the Boomer retirement obligations can only be "met" by inflation reducing the real value of future payments, and the overall level over the next 20 years would have to be at least 8% a year.  Hard to sustain that; more likely it leads to a sudden burst of hyperinflation. 

We have been on an oil standard since 1973, in effect, since so much of the need for Dollar reserves is to pay for oil, and the main oil regimes (Saudi, UAE, Kuwait) price in Dollars.  But they also peg their currencies to the Dollar, and Dollar weakness means they import inflation.  China is facing the same problem.  If the US fails to support the Dollar, these nations will have to break off the Dollar peg.  Paradoxically, the Dollar may then spike - a naked short squeeze - before a collapse into the US Peso. 

Currently the Dollar is in a relentless decline, and like the story of the boiling frog (put a frog in boiling water, he jumps out; put him in a pot of cold water and turn up the heat, he might sit their acclimatizing and get cooked), nations are nervous but trying to accommodate.  But when the boiling frog story was field tested, the frog jumped out in both cases.  And so will they.