Planet Yelnick

Wave 4 Update

We have been tracking an alt count where we are in or have just ended wave (4), which either started back in Nov21 and has done a running flat (B wave lower than start), or Mar6.  Yves laid out the Nov21 count, and this chart from Robin Landry lays out the Mar6 count.  

Here is his comment:

Since this is end of the quarter I thought I would send a chart showing my longer term wave count. I have read many articles and heard much on TV that the economy has hit bottom, the worst is behind us and we are on the road to recovery. The technical picture says that is not likely. The idea that you can spend more than you make and not end up broke is insane, yet our government thinks that they can do just that, and are trying to convince the citizenry that they should continue to spend, spend, spend. 

The chart below is a weekly chart of the Dow and the channel you see is a 2 standard deviation trend channel. This channel usually contains the decline until a change in direction. The wave count I show is:  we are in a wave 4 bounce, with a wave 5 down still ahead of us. The target for wave 5 is the 4400 area. That would then be the end of wave 1 in my count, and the largest rally we have seen so far would occur over the next year. 

I have been saying the target for the wave 4 top is the 9700 area and so far we have failed to reach that level. If this decline shows itself to be corrective and does not decline much below the 7800 then a rally to the 9700 area is still possible. My concern now is we may not reach that level, and could already be heading down in the 5th wave. If so then the decline that started from the 6/11/09 top will turn out to be impulsive over the next week or so.

I will monitor it very closely and let you know if it appears that the wave 4 top is already in. 

I am aware that many Elliott Wave technicians have the wave count as having finished a large wave 1 down at the March 09 low, but the indicators I use to confirm the wave count do not agree. Every time the wave count from others, disagrees with the count I have using the indicators I have used since 1974, my count has turned out to be the correct one. Could this time be different? Of course, but until I know it is wrong, I am not going to deviate from the count that they confirm.  

The main thing I want to convey to all my readers is that I believe the lows are not in, and appropriate action should be taken to prepare for further decline in the markets and the economy.
  

E. Robin Landry

Yves Goes Short! And Wins!

Yves will be on Bloomberg Radio Thursday at 330p ET.  He writes: "We did recommend to buy SDS yesterday, double short.   I rarely go short but this looks too tempting given many of my parameters.  Only a small stake  to be added on with greater confidence.  We will risk only a 5% move up.   However on a greater roll over we will go short much much bigger."   Canadian Dollar (affectionately known as the Loonie) dropped as expected, and he says he converted at 92c.  Treasuries are also up since his recent guestblog post. 

Note to DG and others: moved comments back to the old way. 

Where Markets Go From Here

I am hearing a lot of folk ask whether they stay in or get out right now.  We had about as clear a signal on Jun11 that a top was in: we came out of a trading range (triangle) with a false break and almost immediately fell below the prior trading range.  This is a clear Bifurcation Point.  Since then the market has dropped in a zigzag (535) down, confirming the change of trend from up to down.  It was about at the bottom of that pattern that I began to get the questions.  Of course, almost at that time the market bounced.  

That bounce has left us in an ambiguous situation: the S&P failed to confirm the Dow's new low, and the bounce was larger than the corrective wave b in the zigzag down.  Both are signs that a near term low is in place.  But as Friday's STU makes clear, the trading volume on up days has been "anemic." (They also give additional indicators.)  So watch the Dow Monday to see if it has a jink down to complete the down move, or joins the S&P and Naz in a bounce.  Futures are down right now, but that often is not indicative of how it will perform during the trading day.  

Could Jun11 be THE top?  Possible, but the EWFF thinks not.  (For those of you who don't want to sport for the thrice-weekly STU, the EWFF is an informative and much cheaper alternative.  This month's issue has a lot of good stuff in it.)  Their primary reason is that a typical wave 2 reversal should go more than this one has; more likely to at least 38% retrace of the whole drop, if not 50%, which targets between 9K and 10K on the Dow and 1000 to 1100 on the S&P.  In contrast, Neely has called Jun11 as the top.   Yet he too has expressed concern that the down move has stalled. 

One useful tool that leads to Neely's concern is to draw the up slope from Mar6 to Jun11, and then draw a same-angle downslope off Jun11.  If Jun11 were THE top, we would expect a sharper drop down than the rise up, and be inside that same-angle down line.  We have been below and above that line. As the down movement stalls, the odds increase that a Final Surge up is still ahead.  

The next two days are end of month & end of quarter.  And a pretty good quarter it has been!  We have seen a pattern of sharp rises on the last couple of trading days in a month and the first few of the next month.  This time, however, money managers may want to lock in their quarterly profits and lighten up for a few days.  If the market trends up, I expect them to stay with the trend, but on a downtick they bail. So be prepared for a downish end of June and then a sharp run up in early July.

A possible head & shoulders pattern is forming in the S&P. if the right shoulder forms (an up market) then fades, look out.  I hope that Yves will comment if this is what occurs.  

The USD seemed about to make a run, and then faded.  It might retest the recent lows first, and this may come with the Final Surge.  Weak Dollar, strong Dow pattern.

If we do run up in July and exceed the Jun11 high, a lot of bulls will come out of the woods and proclaim a new bull market!  In another clear insight from the EWFF this month, we can summarily dismiss that scenario.  Volume has decreased as stock prices have increased, a classic bear market rally pattern. If this were a new bull, volume would increase on the rise in stocks.  

Yves on the Greenshoot-Fed Sacred Fed Bull Died Fat and Happy

Or, how wave 4 is rolling over…

 
The obvious sometimes stands clearly. You face it and prepare for the outcome.  We stand at a juncture that would have you believe  in the coming outcome. But wait - lets take a quick journey into what seems to dominate my observations and you can determine the best course of action for yourself.

We have continually watched monetary aggregates and they are contracting. You will notice from the M2 chart divided by the monetary base a drop. This is significant and comparable to the 1930’s. The complaint would be the same as to banks sitting on a monstruous pile of cash but not lending it. The tradional behavior of the consumer to start saving instead of buying also compounds this problem. M2 decceleration cannot lead to inflation. The Fed cannot force the banks to lend and monetizing bonds will continue to aggravate the only asset  that people have en masse their household. An inflationary outcome is tantamount to financial hara kiri. The bonds vigilante will strike hard and mortgages will keep rising, killing any stabilization that is in process. The impact of the recent rates hike will be felt in the stock market in the next few months.

Given the choice to protect housing or stocks, the Fed will surely realise to go the real estate way. A liquidity trap as such is deflationary. The money base also doubled in Japan after the stock bubble collapsed and to no avail the economy kept contracting.

Are bonds finishing the C wave or are they in complete fast and furious 3rd wave?  This is the question we did pose in the article May 2nd. If the Fed gets it, they stop buying and monetizing the debt then it is a C wave.  

On the next graph, the spread of the discount rate to the rate of the long Treasury has never been so wide.If you had bought on a few occasions where the spread was wide as 4% between both, the resulting trade would be a winning one on most occasions.

Unless you are suggesting the Fed raises rates by about 2% over the next 24 months then buying treasuries would not be a great investment. On the other hand if you believe that there is little room for the Fed to move, then long bonds are an even better bet. There is a fine line that the Fed is walking and a slight tilt of strategy can undo with great dammage what they have built so far.Mild deflation is the preferred outcome and necessary one.

We have sold all of our inflation hedges that we owned for the last 2 months.We are turning to deflation trades or unwind. Possibly the greatest misunderstanding in the lift off of all markets singularly correlated is a function of investment demand and not real changes from supply/demand. Realise that all markets cannot possibly beat to the same rhythm for a prolonged time. Those correlations will unwind and support real bull market where there is cause for that.

We have held for a while our position of a rare 4th wave at this juncture. The last move up does look impulsive but is part of an ABC ABC 12345 pattern. The pattern still holds to the rules established. The implication is for a 5th finishing wave that will complete a bigger A wave down. The general area of the March low is the objective. It could be truncated or extended. I will be looking for an equivalent 3 standard deviation in sentiment measures to call the bottom if that was to occur. We are looking to short the market on the wave 2 of 5 and not before since window dressing could still be part of present activity.

The bull market ate too many greenshoots and died of natural causes.  Often bull markets roll over from their own weight.

Yves Lamoureux, Investment Advisor, Blackmont Capital Inc.
 
The opinions contained in this report are those of the author and are not necessarily those of Blackmont Capital Inc.. Every effort has been made to ensure that the contents of this document have been compiled or derived from sources believed to be reliable and contains information and opinions which are accurate and complete. However, neither the author nor BCI makes any representation or warranty, expressed or implied, in respect thereof, or takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use of or reliance on this report or its contents. BCI is an independently owned subsidiary of CI Financial. CI Financial is a Canadian owned diversified wealth management firm, publicly traded on the TSX under the symbol CIX. Blackmont Capital Inc. is a member of CIPF and IIROC.

Neely Calls the Top

Neely put out a press release that the top was in on Jun11.  "According to NEoWave, a correction began at last October's low; the March-June rally is the final leg of that correction. The March-June rally is now ending, allowing the bear market to resume. During the next six months, the S&P will decline 50% or more, breaking well below 500!"

A Longer Pause Before the Final Surge

I need to clarify last week's call for a pause than a final runup.  The pause is still on; the final surge awaits.  The brief pop late past week is a classic thrust out of a triangle, and denotes the end of the recent wave move.  Last week's triangle was a minor degree wave 4, and the pop was a wave 5.  I do not expect a resumption of the move up for a while.  The markets today dropped below their recent trading range in the triangle.  This makes it a Zoran Bifurcation Point and a change of trend.  This is a pretty clear wave pattern and should be respected.

The two major wave pundits concur as to what this thrust then drop means. They both expect a drop now. Where they differ is whether the top is in.   Neely sees high odds the top is in, but the STU sees this as a second X wave to be followed by the Final Surge: a three-wave pattern, probably another zigzag. The whole move off Mar6 may end up as a triple ABC, labeled W-X-Y-X-Z.  We have been through W in March, then the X pause in April, and now a longer Y in May and half of June. The May market feels like a long trading range since it encompasses the end of the A wave (iv and v), the B wave, and the start of the C wave (i and ii).  To add support for this view, all the other markets are rolling over: Dollar is up, Euro is down, Bonds are up (rates down), etc.  

For those waiting for Yves' latest, he promises an update shortly.  In the meantime, here are his comments on the USD and Bonds, plus a newsletter. He sees a comparison to 1987, and suggests it is now time to lighten up, especially as when this turns down for real, it could drop sharply.  In other words, even if a Final Surge is ahead, why take the risk?  The wave structure is also be consistent with the top being in.  

The timing for this X wave looks to be around the length of the prior one, or at least 10 trading days; so look for a trading range to down market into early July.  

A Look at the Longer-Term Wave Structure

Upstart asked a question about whether the 2002-07 period was a wave 5 or a B wave.  EWI has also been asked similar questions, including whether the 2000-2009 period could be considered a wave 4 flat that is almost over.  Wave 5 to come!!  New highs!!

This month's EWT takes a stab at this question.  They note that the flat structure looks best in the S&P, but less so in other indexes, including the Dow.  Further, the whole formation looks long and huge for a wave 4 of the bull run since 1974 (nominal) or 1982 (real), especially compared with wave 2 (76-82 nominal, 87-91 real).  Also, the bull had such a disproportionate run up in time (26 years from 74 to 00 compared with 5 years in the last wave 5 from 1925-29), for this to be still in that wave 5 seems low odds.  An the killer is that the exigent circumstances are the worst economic debacle since the Great Depression; hardily the set up for a minor degree wave 4 and a continuation of a bull market.  So, no.

To me a more interesting question is whether the 2002-07 move was wave B or a final wave 5.  It is more reasonable in time and structure to make the 2000-2002 drop a minor wave 4 of the bull, and 2002-07 the final wave 5, then for the whole move from 2000-09 to be a minor wave 4.  One way to distinguish a B from a 5 is sentiment.  Fifth waves (unless they extend) are not as strong across the board as third waves, whereas B waves tend to have more extreme sentiment.  On that score, this seems much more like a B fake-out than a 5th wave whimper.  

In the short run, it doesn't matter; the wave down off 2007 has more to go whether it is wave C of a large bear market or wave A of the beginning of a bear market in 2007.  In the middle term, it could matter, as to how long until this secular bear ends & how low it could go.  More on that below the fold. 

Bernanke's Operation Twist II Has Failed

Last Dec the Fed hinted at Quantitative Easing (QE), where among other actions the Fed would print money by buying bonds in the open market (creating money by putting fresh Dollars into the seller's bank accounts without any offset somewhere else).  Last Mar the Fed Chmn Bernanke announced a specific plan of $1.2B of open market purchases, of which $300B would be Treasuries (later clarified as $1.25B of mortgage-backed securities and $300B of Treasuries).  His stated intention was to lower interest rates by paying above market prices for the bonds (higher bond price results in lower interest rate).  He is about half-way through with this plan, and yet interest rates have risen quite a bit, with 30-yr mortage rates now around 5.8%, much higher than Bernanke's 4% target.  The WSJ will report tomorrow that the Fed is reconsidering this method of QE.  As the article notes: 

Yields on 10-year Treasury notes fell Thursday to 3.862%, after Wednesday's brush with 4%. But they remain sharply higher than March's 2.5% ... If government-bond rates rise too much too fast, they could short-circuit a recovery by choking off consumer and business borrowing and spending.

What is interesting about the rest of the article is how confused the punditry is.  Are rates rising due to inflation fears?  Or a recovering economy?  Or foreign buyers swapping down to short-term bonds?  (In an interesting juxtaposition, a recent WSJ columnist recommended bying shorter term CDs to manage the uncertainty of inflation vs recovery risk).  Or is it due to the bond market calling Bernanke's bluff?  If the latter, Bernanke is about to blink. 

I find the confused rationale for rates rising a bit much.  The Fed watchers need only look at history to see the limits of the Fed's ability to manage rates in this fashion.  I have written before on Operation Twist, an ill-fated attempt by the Fed to use the same QE technique to keep rates low.  It flopped - rates rose during the whole time of Operation Twist - and it left a horrific legacy: the Great Inflation of 1966-1982. 

So why are they really confused?  Prechter put out one of his better EWT's tonight, laying out why the fears of inflation and the hope of recovery are all about to be washed away in the coming events.  Worth a close read.  The current circumstance is an example of where his Socioeconomic viewpoint is helpful to cut through the confusion.  Man is a herd animal and the herding instinct is strong, but split into two cmaps: inflation vs recovery. The stock market counter-trend rally has emboldened the bulls, and sentiment is rising to expect a recovery just around the corner.  Same sort of psychology marked 1930.  Hence the confusion is really over which herd to join: the ones fearing inflation, or the ones expecting recovery?  It is NOT over the soundness of QE, which has failed when attempted previously, by the Fed and others (such as Bank of Japan.)  And now is another example of the Fed's impotence. 

The Pause Has Refreshed - Now the Final Surge

The STU has updated their count.  The slow patch in May is now best counted as a flat.  It was followed by a classic Zoran Fractal: a thrust and plateau at the end of May/Start of June.  We have since been in The Pause before the Final Surge.  The thrust was a wave iii and the pause nea plateau counts as a wave iv triangle, which ended today (intraday).  Targets for wave v include over Dow9K, but 10K seems a stretch absent an extension.  Sentiment is getting very bullish - as bullish as Dec07 for stock advisors, and of the Jan6 high for small investors!  Still, they may get even grossly more bullish before the end. To the STU this means any near term pullback is likely NOT the end of the Obama Hope Rally. 

Concurrent with this Final Surge, we should see a reversal in Bonds (rates dropping). The long bond got to 4.83%.  The 10-yr hit 4%, the largest jump since May03.  Bad news for mortgages - the 3- yr hit 5.8%, clouding prospects for recovery.  (Refinancing of mortgages had been underwhelming prior to the recent rise in rates, anyway.) Another auction tomorrow, of the 30-yr long bond. We'll see rates spike up before reversing. (Chart courtesy of the WSJ.)

The USD rally has had a setback; given how it runs inverse to equities these days, the pullback may lengthen as this wave v unfolds.  Neely is fairly clear that he expects a Euro rally and a USD drop near term.  The STU in contrast thinks the Euro has topped and should go down to the $1.35 area.  A pundit divergence worth watching. 

China Stockpiling Explains the Rise of the AUD

The AUD ran up to 98c to the USD then fell to just over 60c in the past year.  Now it has run back up over 80c.  What gives Down Under?  Gary Dorsch does a great job of explaining the mystery.  As his chart shows, It has run up with the general commodities spike since early March, and has been driven by massive Chinese purchases, ahead of their 2008 pace.  As Dorsch puts it:

Thanks to massive government spending on infrastructure, China's daily crude steel output in May reached 1.5-million tons, equal to an annualized rate of 544-million tons. That compares with 500-million tons in 2008, lifting the fortunes of Australia's top iron-ore miners, BHP Billiton and Rio Tinto. China's imports of iron ore is on a record-breaking run, reaching an all-time high of 57-million tons in April.

Will this continue and drive the AUD to USD parity?  Well, maybe not  The NYT sees China as stockpiling.  "[G} growing evidence suggests that a sizable portion of this buying has been to build stockpiles in China, and may not be sustainable."  Why?  "[A]ctual steel production from that iron ore is recovering much more slowly in China, and Chinese steel exports remain weak."  The article goes on to note that the Baltic Dry Index of shipping prices shows expectations of weak trade through 2011.  Perhaps the Chinese have found a way to recycle all their excess USD holdings - buying commodiites at low prices when shipping costs are low. 

The wave count suggests the AUD is peaking. 

A Bit of a Wild Moment in the Market Today

During the late afternoon today (3:15pm ET) we had a surge in prices for about 15 minutes, then a pullback.  The STU is not sure what to make of it, and speculates that either a trading bot bought big, or an error had to be corrected, or a leveraged ETF had to reconcile.  While the major indexes rallied back from a down day, overall volume was modest (the third slowest of the year) and breadth was 4:3 bearish.  So the end of day surge is not supported by momentum indicators.  The expected 'pause in the final surge' seems to be developing. 

The STU suggests watching two things: first, a non-confirmation, such as one major index hitting a new high but the others falling short; and second, a drop below the prior fourth wave low at Dow 8600 (SP923); which will confirm that the wave pattern is complete and a major pullback is underway, if not the end of wave [2] up.   Neely has been entering short and being stopped out - four times so far - and he half expects a fifth time but thinks the odds have increased that the top is in.  (if you wonder of his method, it is to risk a small percent each time, and stick to the stops; but better to risk a little than miss the sharp fall off the real top.)  

If instead last week's highs are exceeded in all major indexes, this puppy has a ways to go; we would have completed only a wave i of a five wave pattern, not the whole pattern itself. That way lies the Final Surge, with Dow10K and a 50% retrace of the whole drop from last Oct07.

In the meantime, the Dollar appears to be solidly rallying, and bonds appear to be bottoming.  A T-Bond rally is at hand.  These moves might end the recent speculative bubblet in commodities, including oil.  Most interesting, the STU watches the gold/silver ratio.  When silver outperforms gold, it suggests a return of an appetite for risk, which we have seen across many markets since Mar6. When this flips and gold outperforms silver, it suggests a return to fear and an avoidance of risk.  It is reversing, which signals the end of this wave [2] bubble echo rally is nearing; but the STU still expects a Final Surge before the end, later this summer. 

Pause in the Final Surge

We might now see a week-long pause (trading range) or drop.  One of my favorite indicators, the VIX, has crept up even as the S&P has also crept up.  Everyone calls the VIX a volatility index, which it is, but I think of it more directly as a measure of premiums paid for options (which is what it measures).  When the VIX goes up, premiums of options have increased, meaning more hedging of positions is occurring.  Volatilty is anticipated.  When the VIX goes up as the S&P goes up, it indicates anticipation of topping.  Sy Harding also points out that the week before options-expiration week is usually negative.  Friday's STU sees us as about to start a serious drop, albeit the current wave pattern may not have quite completed.  This is not THE drop just another correction on the way up.  Neely has a similar perspective - he points out that traders seeking to short will probably face several more drops (where the short looks promising) followed by a reversal up before the topping process has ended. Both say the top could be in, but the odds favor a continued rise after a pause or drop. 

Note to Neely subscribers: one of the more avid commentators to this blog, DG, is setting up a private message board to discuss Neely, but only for subscribers.  To join, follow these instructions. 

Clear Triangle in Euro is On Final Leg

Check this out from Slope of Hope

Dollar Reversal and Commodity Drop?

Good stuff in the STU tonight. USD may have bottomed - huge move in forex worldwide today.  USD shopuld now run back towards 90 in the Dollar Index.  A lot of sentiment points this way - very few USD bulls and glowing stories in the British Press over the GBP.  If so, expect a huge reversal of almost all markets that have run up as the USD dropped: oil, other commodities, certainly other currencies, and most striking of all, Treasuries. 

Venture Capitalists Giddy Again?

Tech stocks tend to lead out of a recession.  Oldtimers remember the huge surge in small cap tech in 1980-83 coming out of a double dip recession, leading to a blow off top in '83 that wasn't equaled until '00.  The dot-com surge exploded out of '94, a slow patch.  Around 200 tech companies came out of the dot-com bubble in good shape, and the leaders surged in '03 as we came off the bottom.  Right now only tech has real momentum, coming off the Mar6 bottom.   So is history about to repeat? 

We have had several IPOs recently, including SolarWinds and OpenTable, both of which performed well.  OpenTable has a dot-commie valuation.  IPO bankers haven't had much of a bonus for two years, and now they are canvasing the major venture funds to see which deals could be dressed up (a little lipstick here, a little ebitda there) to go public.  The WSJ even prepared their own cheat sheet of likely IPO candidates.  At last count, only 14 candidatdes were in registration; look for a flood to begin filing over the next two months. 

We see a sudden change in attitude towards risk. Treasuries are dropping (rates rising) as they had been the safe haven against risk. Now money is flowing out into more risky areas.  This is healthy, although clearly an irrational bubble of sorts has already formed in commodities, especially oil.  When tech is hot, it provides extraordinary returns against the risk.  Watch this sector for insight into the broader market. 

Tracking the Final Surge

As expected last night, we have started a Final Surge up.  We can look back an see the following pattern:

• ABC zigzag up off Mar6, with the B wave breaking as a triangle across most of April
• X wave across the last three weeks, also breaking as a triangle
• Initial pop off the X wave breaking in five waves, meaning a second zigzag (535) is underway

This X may also end up being counted as a B of one large zigzag; it doesn't really matter.   The STU tonight now accepts us as having been in a triangle that just ended.  The primary alt count is as an expanded flat, this being wave B; but the breadth of the rally makes that less likely. 

The A and B of this wave should go up then back almost to the start, making it feel like a continuation of the X wave, even though it isn't.  This will make shorting difficult.  The turn off wave A will look like a top, even though it isn't.  If you feel like trading, I recommend you buy the STU service or Neely's trading service.  Otherwise you could feel whipsawed.