Everyone Is Bullish and That's Bearish
MARKET INSIGHT
We are living in a time of change for all global economies and markets. The historical events that occurred worldwide during the latter stages of 2007 have created a world that is over regulated, manipulated and growing less rapidly in industrial counties. Simultaneously, sovereign debt has exploded in some countries as the world's governments created a strong bounce through the use of excessive monetary stimulus. Yet most industrial counties remain below pre-crisis levels of GDP. The main risk facing the global economy in the
near term stems from debt sustainability issues in high-income Europe. The potential for sovereign default runs high in Europe and threatens the existence of the EU. Should these problems not be resolved in a smooth manner, global GDP could be much weaker. Finally, some argue that it will be difficult to generate any significant inflation over the next three years leaving the greater potential for a deflationary environment which is fractured across different parts of the globe. The chat of Real GDP below depicts a grim picture for industrial nations.
Real GDP Inflation **
Current* Q4 10-Q3 11 Current* Q4 10-Q3 11
United States 2.6% 1.5%-2.05 1.3% .75%-1.25%
Europe 1.3% .75%-1.5% 1.5% .5%-1.0%
United Kingdom 2.0% .75%-1.5% 2.7% 1.75%-2.25%
Japan .9% .5%-1.5% -.2% -.5%-0.0%
China 9.1% 8.0%-8.5% 2.7% 3.0%-3.5%
BRIM*** 5.5% 4.0%-4.5% 6.0% 3.5%-4.0%
*Current data for real GDP growth and inflation represent year-over-year consensus estimates for Q3 2010 through Q3 2010
**U.S. inflation is core PCE. (Note: Core PCE is usually 50 bps lower than Core CPI). Japan inflation is core CPI.
***BRIM represents Russia, Brazil, India and Mexico
Source: PIMCO
Given this brief overview, please read this publication and note how the Elliott Wave Principle provides the context for each market that I discuss. I believe that you will find the reading informative while bridging the gap between macro economic analysis and technical analysis.
World Stock Markets
US Markets
A major top in the US is nearing with the backdrop that December is historically a good month for stocks. Investors and traders alike are wasting no time waiting for the Santa Claus rally.... they placed bets on the prospect of an extension of the Bush tax cuts, and QE2 would create bullish enthusiasm and drive the major indexes and commodities north. This enthusiasm towards commodities, stocks, metals and energy issues are evident. They are highly correlated to each other, and negatively correlated to the USD. The stage is set for the next tandem decline.
As the market heads into the final weeks of December, several market internals confirm the giddiness that I speak of. The attached chart of the $SPX shows that TVOL (total NYSE volume), the MS UPDV_Oscillator 25 (NYSE Advance/Decline Volume Oscillator ( 25 day ave)), 5-day NYSE AD/DEC Ratio, and the 5 day NYSE New High/New Lows. The AAII poll of individual investors has reached a level of bullishness that is greater than levels at previous market peaks. Each of these indicators presents a warning to the forthcoming decline.
Elliott Wave Analysis
The most recent high on December 14, 2010 met the minimal conditions for w.5 to be complete. I'm looking to identify the advance that began on 11/16/2010 as the top of minor w.(2). A final push to 1245-1258 would complete that structure. Note that this also coincides with the 1.382 RF and 1.618 retracement of w.4 at the daily chart level.
With that said, the wave structure is problematic. From the low, 665.7 in 3/2009, the wave count doesn't count well. W.(B) and w.(C) is short compared to w.(A) leaving the operative interpretation (stated above)suspect. This opens the door to a wave structure that could be unfolding in an expanding flat ( See ALT count on weekly chart).
Bottom Line: Either interpretation leads to a big move to the downside. Prices have risen but fewer stocks have the strength necessary to sustain this rally. Investor confidence is at a high and the market internals are weak right against resistance. The market is ripe for failure!
Europe
As noted in the table of Real GDP growth, Europe's inflation for Q4 2010 - Q3 2011 is 5%-1.0% . It won't take much to tip these projections to the negative side. Moving forward, Europe remains in a deflationary trend. Sovereign risk has become paramount as it threatens the very existence of the EU. To shed some light on how serious the situation is, only Germany and the UK markets show any upside potential (see charts)while most other European countries (peripherals) are either sideways or have already made a significant turn to the downside(PIGS). A most recent article from Norial Ribini, published by CNBC http://www.cnbc.com/id/40659282 portrays a grizzly ending to the European crisis.
The foreign exposure to Greece, Portugal, Spain and Ireland by bank nationality shows the potential domino effect that could spread across Europe. Notably, banks that have the largest exposure to Spain are Germany, France, U.S. and to a lesser extent other Euro areas. Should Spain need a bailout by the ECB, the impact could be felt home here in the U.S. Also what is striking is that Ireland's debt is segregated between Germany and the UK. This kind of information is useful because if, the sovereign crisis gets out of hand, expect that Germany and the UK will be under pressure due to the disproportionate percentage of exposure.
Since early November, concerns about sovereign risk in several euro area economies have resurfaced and have become the dominant theme. Earlier this month the cost of protecting sovereign debt (CDS) climbed for France, Germany, Italy and Spain. In fact, each county hit all time highs. Is this telling us something about the likelihood of default, debt sustainability and refinancing challenges? The blowout of credit spreads were driven by two factors: the deteriorating fiscal situation in Ireland that resulted from continued government support for troubled banks; and consideration of EU treaty changes that would make it possible to impose losses on holders of bonds issued by governments in financial distress. The €85 billion support package for Ireland has exacerbated the attention on the risk of sovereign contingent liabilities where the government needs to extend support to the banking system. The sovereign debt problem has assumes a new dimension. These ongoing uncertainties will not be resolved by early 2011 and large sovereign and banking sector refinancing needs will be a challenge, especially for slow-growth and high-debt countries in Europe. Given the way that the ECB has allowed the Greek contagion to grow and fester into something larger over the past year, the most likely scenario is for a continuation of instability within the European markets. Let's see if the charts agree!
Elliott Wave Analysis
Germany
Near term the DAX is tracing out w.(C) of w.2 circle. Upside targets are 7270 i.e. the previous w. (2) to as high as 7521.
United Kingdom
The FTSE's is working on completing w. (C) of w.2 circle. Notice that price has been contained within the corrective price channel... a classic signature of a correction. Near term the upside targets are 6213-6214.
Portugal
Portugal starts the discussion on the European PIGS, that is with the exception of Greece. The best wave pattern puts Portugal correcting in Supercycle w. (IV). W.(III) topped in 3/2000. The current decline counts as a 1-2 but the pattern thereafter is less than ideal. One would expect a (steep decline in a short period of time for a motive w.3. It also looks rather corrective, possibly a triangle is forming that would negate the operative count and change w.2 into w.(A), a triangle w.(B) and then higher. We'll have to see what develops and my count may need further revision.
Italy
Italy has completed w.(A) from the low of 12215 and is likely tracing out a complex corrective w.(B). The outlook when complete will resolve to the upside. At this time I am not able to accurately describe the wave count with any certainly.
Spain
Spain is currently working it's Supercycle w.(IV), an expanded flat that when complete would draw price well below 5266. The most recent decline counts as a pair of 1-2's. The first order of business that I need to see that will confirm this interpretation is a decisive break of the lower boundary of the price channel. This confirms wave three price action. Until then I remain cautiously opportunistic about the count and of this market.
France
France is currently working a correction that is contained within a corrective price channel. There is nothing impulsive about the move from 3256 (w.1). When completed, the stage will be set for another round of selling.
Switzerland
Switzerland's chart is much like France's. I've placed some alternative labels on this chart that could easily be applied to that of Frances chart. What is important to realize is that the direction of either wave interpretation is still down.
Asia-Pacific
Of all the markets that I follow, the emerging markets hold the most promise for growth and higher market prices. The leading emerging markets in Asia have overcome the adverse affects of the global crisis and have restored strong growth. China’s massive stimulus package was a major factor in the country's and regions economic resilience.
Key economies will maintain their growth and developmental phases. The consensus trade for 2011 is long but headwinds exist. Heavy inflows of cheap money continue to flow overseas raising questions over how much money can be absorbed before asset bubbles are created. Excess liquidity is fueling inflation, potentially leading to overheating and rate increases in several local markets that could have adversely affect these economies and the potential for price appreciation. Secondly, the potential instability of Europe threatens the East-Asian markets in part because both exports and investment are large shares of regional economies and these are precisely the two channels through which a deeper European crisis might be transmitted to developing countries. As the economic outlook for Europe diminish, austerity measures among the highly indebted countries of the Southern Euro Zone, as well as in France, Italy, the United Kingdom and others are counter productive to near-term economic activity and import demand from Asia. Therefore, the growth of export markets and trade for East Asia may be less robust.
Elliott Wave Analysis
China
The Shanghai Composite is correcting the move from the high that was set on 10/07 to w.A circle. The operative wave structure anticipates a further advancement to 4133 whereas w.(C) = w.(A). As an alternate interpretation, it is possible that the corrective structure is more complex, whereas w.B has completed or is still building. Under this interpretation I would expect to see further weakness that will carry the market below w.B. Price should not take out the 2008 low at 1664 before making a significant advance.
Hong Kong
The Hang Seng Index is currently in a major sideways triangle consolidation phase. Each leg is composed of three wave structures. The most recent decline should carry to 2223, a great location to capitalize on the ensuing advance to w.D circle. Thereafter I expect a significant decline to complete the pattern at w.E circle.
What's important to realize is that triangles occur before an impulse wave. Should this wave interpretation be correct and assuming a trader has the patience to follow this market, one could expect a major advance from w.E circle that carries well beyond the 2007 high.
Korea
The KOSPI has made a strong advance from the 2008 lows and has almost reached the first possible target for the termination of w.(1) at 2041.04. The next major target is where w.4 divides w.1-3 by 50% or 2164.78. Once w.(1) has completed, an excellent short opportunity would exist that brings price to a minimal target of the previous forth wave of 1532.68.
Japan
Japan continues to struggle compared to the other Asian-Pacific markets. The current wave structure is contained within the corrective price channel. Price should remain in the channel if the wave interpretation is correct. Currently I see this market pushing higher in a w.(iii) advanced followed by a brief decline for w.(iv) and a final push up in w.(v) of w.C of w.(B). W.C of w.(B) = w.A at 1245.50. The .50% retracement of w.(A), 1268.5, is just above this target and should provide additional resistance.
Taiwan
The Taiwanese market has completed a contracting triangle w.IV of the 1999-2000 bear markets. I have currently labeled the wave structure as a (1) (2) but the decline of w.(2) is very shallow that may suggest that the most recent advance is actually w.5 of w.(1) that is still unfolding ( See ALT count).If the operative wave labeling is correct , I'm expecting a large advance to a minimum of 11465 where w.(3) = w.(1) but the most common expansion would surround the 1.618 extension of 14204.51 area (not shown on chart). Should the current market advance find resistance at 9771.81 and then decline below what is currently labeled as w.(2), the odds favor that the alternate count was unfolding. Expect further weakness before resuming the larger trend up.
Singapore
Singapore's current wave structure is at a junction where my count is unclear. The current rally from w.A, 10.47 has only unfolded in three waves therefore it's a corrective structure that should be completely retraced. A rise above 14.56 would negate this interpretation. If the operative interpretation is correct, we are working an expanded flat correction and w.C should carry to 8.52-8.88 region to complete w.(B).
Looking at the futures contract, a H & S pattern is unfolding. A break of the neckline would indicate a potential target to 2881-2909. This view is consistent with calling for a decline in the i Shares Singapore Index.
Australia
Like China and Japan, w.C, circle has yet to reach or eclipse w.A circle. So expect plenty of upside from here. Potential targets surround 5297 where w.C circle = .618 w.A circle and 5998 where w.C circle = w.A circle. Note that the .618 and .786 retracement of w.a adds confidence that these areas are likely termination points.
Currencies
US Dollar
The US Dollar trade is perplexing. Since 4/2008, the Dollar has traded net sideways and has recently shown signs of bullishness even in the face of the QE2 announcement by the US FED and talk that the dollar would be devalued as a result of monetary easing. Daily bullish sentiment reached 5% on 11/3/2010... the day of the last move down and simultaneous QE2 announcement. The US Dollar is inversely correlated to the US equity market and speaks to the concept that all asset classes will rise in tandem as long as the dollar remains weak. Let's look at some charts to get an indication of the direction of the Dollar in 2011.
At the monthly chart level , a five wave decline has been made, yet price has continued to trade sideways for a two year period. I've labeled the wave structure as a triangle which would not be a correct interpretation unless the decline from 7/2001 was still unfolding and another round of selling will soon unfold after the triangle completes at w.(e). If confirmed the wave labeling would be changed accordingly. Also note that price has stayed within a corrective channel. Until the upper boundary of the channel is broken, I can't get overly bullish. View this interpretation as bearish for the dollar until otherwise negated.
Turning our attention to the weekly chart, I'm focusing on the same wave pattern that I showed on the monthly chart. This is the bullish interpretation. Trade has given several bullish signs such as the break of key resistance, the decline from w.(1) to w.(2) terminated in only three waves which is a corrective structure that should be fully retraced by a five wave advance; trade is above the 200 sma and is now testing the 55 sma ( a fibonaccci number). The next major clue to the longer term direction of the dollar lies within a test of 83.64 or critical resistance. Should this occur, expect 88.80 to be broken in what would bolster the bullish case. As long as critical support is maintained at 75.23, the w.(2) low, the bullish interpretation is valid.
Euro
The Euro's decline has matched the Dollar Index. A similar test to that of the Dollar lies at 1.2584 or critical support.
Franc
The US Dollar appears to be vulnerable to further declines as my interpretation of the wave structure shows that a w.4 circle triangle had terminated at 1.1731 and the pair is working w.5 circle.
Aussie Dollar
The Aussie dollar continues to rally against the US dollar. While it is possible that w.5 may have ended at a 1.0183, where I have labeled w.iii, a common multiple, I believe that the the structure counts best if there is one more push to the upside. Look for further upside to 1.0846.
Yen
The US Dollar is in it's final stages of making a major bottom vs the JPY. The current wave structure appears to be a series of threes, indicating that an ending w.5 circle diagonal pattern is forming. If this interpretation is correct, expect an initial thrusting move back to the origin or w.5 circle at 124.14.
Metals and Energy
Yield-searching investors continued to move into commodities. Gold and copper prices climbed to record high as the dollar has weakened from 6/2010 - 11/2010 and boosted the demand for commodities as an alternative investment. Gold for delivery in February surged to a record high of $1,432.40 an ounce, while NYMX Copper rose as high as $422.90. Crude oil price rose above $90 a barrel to the highest level in more than two years.
With gold, silver and copper are near or at all time highs. I believe that there is a potential major move in gold, silver, copper ahead in 2011. As I mentioned earlier in this publication, all asset classes have been rising in tandem against the backdrop of massive amounts of easy money. As such, I will devote much more time reviewing the charts to uncover the opportunities that I speak about.
Gold
From the monthly chart we have an obvious uptrend in Gold. I have labeled the chart with the operative count, i.e. currently working w.5 circle and the alternative count that implies that price will continue much higher ..... consistent with the weaker US dollar thesis. To date, we have no evidence that a top is in place. In fact, the wave count suggests that we will see further selling down to complete an expanded flat at 1311.6 before resuming the uptrend. A word of warning - there is a case that can be made that Gold has already completed it w.5, of w.(5) of w.5 circle at the daily chart level. Therefore, I remain on alert at the daily and intraday levels to identify whether a top had already occurred or whether another move to the upside completes the count. Caution is warranted in picking a top in this market.
Copper
The wave interpretation for Copper is very bullish. At the monthly chart level, the wave count best fits working w.5 circle of w.V or w.III. Price is approaching a significant are of resistance that was established from the 2008 top, 426.05, w.B circle. A break of area bolster the bullish outlook.
The weekly and daily chart levels break down the sub-structure of the monthly chart. Upside potential for the termination of w.III circle is where w.V = waves {(1)-(3)} at 497-500.90.
A proxy for copper and to a lesser extent gold is Freeport McMoran (FCX). Notice the wave structure corresponds nicely with upside potential to 147.82,where w.V = waves {(1)-(3)}
Crude Oil
Like gold and copper, the wave interpretation for Crude is bullish. At the monthly chart level, the wave count best fits working an A-B-C correction from the 1/2009 low w.a with upside potential where w.C = w.A at 108.975.
The weekly and daily chart levels break down the sub-structure of the monthly chart. The daily chart shows a tight consolidation that has held support at 86.475 - 86.75. looking at the lower time frames (not shown) it looks like another small move down is required to complete the corrective price structure.... setting the stage for further advancement.
Happy Holidays!
Best of Trading
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Trade at your own risk. The information provided herein provides the context for market analysis with respect to a market's, a security or a commodity's general position utilizing the Elliott Wave Principle. The information contained herein are the opinion and general comments of the author and is based upon information that Mr. Sinibaldi considers reliable but neither ElliottWaveLive nor he warrants it's completeness or accuracy and it should not be relied upon as such. Mr. Sinibaldi or ElliottWaveLive are not under any obligation to update or correct any information provided in this publication or on this website. Any statements and or opinions are subject to change without notice. The information and comments contained herein neither purports nor intends to be, specific trading advice. It has been prepared without regard to any particular person's investment objectives, financial situation and particular needs. Information should not be considered as an offer or enticement to buy, sell or trade. You should seek appropriate advice from your broker, CTA or licensed investment advisor, of which I am not, before taking any action. Past performance does not guarantee future results. Simulated performance results contain inherent limitations. Unlike actual performance records, the results may under or over compensate for such factors such as but not limited to; lack of liquidity, commission and slippage. No representation is being made that any account will or is likely to achieve profits or losses to those shown. You acknowledge and accept that all trading decisions are your own sole responsibility, and any contributor associated with this blog, including Mike Sinibaldi cannot be held responsible for any losses that are incurred as a result. Trades shown in this publication or on this blog site are hypothetical (they weren't executed), unless otherwise noted. They are shown for illustration purposes only. When applicable, executed trades used for illustration purposes will be fully disclosed within the body of the subject matter.
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