Wednesday, April 7, 2010

Gone fishing...

This will be my last post for the next few days as I am taking a much needed break to do some deep sea fishing. Yellowtail and rock cod are in my thoughts, and this year has many rumblings of a record season due to "El Nino". Oh, the fish stories I will have to tell...

Overall, it has been an excellent time to be an elliott analyst/trader focused on the EUR/USD pair. The patterns have been about as clear as I have ever seen them, and the counts have been relatively easy to trade. While I am relishing in such good fortune, I am also cautious of such ease. I have said it before, and will probably repeat myself a few more times... we appear to have 5 waves down from last Novembers highs. While the internal structure of the 5th wave does not quite look complete, it is now 3 weeks along it's path. Whether it turns out to be an ending diagonal, or a straight impulse move remains to be seen, but the move is heading into its latter stages. That doesnt mean that I am will stop shorting, but it does mean that I have shifted my priority to risk management first (see my recent post on managing risk).

My latest short term ending diagonal count from yesterday is still in play, so no need to update the internals quite yet. SInce I will be out of pocket for a few days, and we are near a potentially critical juncture, I thought I would post a chart of the overlapping fibonacci fans that have made up wave 5 so far, and leave you with my current thinking of potential courses the market may take.

Based on the current count I am following, we are in a wave 3 of 5, which should take us down to new lows over the next few hours. Once that breach takes place, I will be looking for support near the blue lower trendline to give a bounce (a wave 4 of 5). If it does not, and price action moves through with strength, then I would move the odds away from an ending diagonal for the 5th wave and instead to a clean impulsive wave. In the unlikely event that we begin rallying and break through the fibonacci fan that I have should with strength, BEFORE we see new lows, then I would begin to look for evidence of a corrective wave (something in 3 wave form) toward the upside that does not exceed 1.359... I would call that move a small degree wave 2 of wave 3 of wave 5. This move may happen even if we do get a new low, especially if RSI is not peaking, so I would watch for it.

Bottom line is that the trend is still down as long as short term rallies are corrective in nature, and selling patterns look impulsive. Simple, right? Stay safe... will post again on Monday.

Tuesday, April 6, 2010

Since the Panic of 2008 - Comparing Gold, the Dollar, Stocks, Bonds, and the Euro

It's August 2008, and the financial world is in chaos.
Talk of bailouts, Lehman Brothers, Bernanke, and Paulson is everywhere.
The stock market market is well off it's 2007 highs.
Oil and gold have recently reached all time price highs.
There is talk of a dollar crisis.
The panic is palpable.
Welcome to a Grand Supercycle Elliott Wave correction in social mood.
You question yourself, and your investment advisor almost on a daily basis, "Is my money safe"?
Noone seems to have any certainty for the road ahead. You make a decision to change your investment strategy...
Depending on your trusted information sources, beliefs, and bias', your decision might have lead you into one or more of the following asset classes:

Cash (dollars in my case since I live in the USA)

Now, almost two years later, and I thought I would take time to measure the results and ask myself a few questions.

Below are the results of each of these asset classes (including the EUR/USD currency pair) from the view of % return on an investment made in August 2008.

In my investing and trading life, the best lessons are learned through honest self evaluation and a strong strategy that forms as a result.

Are these results what you expected them to be? If yes, what guided you to success? If no, what were the critical mistakes you made?
Results for Gold the Euro and the dollar were pretty much as I expected them.The Euro bounced a little higher and for longer than I thought, and Gold has held up better than I thought in spite of the recent dollar rally. The long bond (represented by TFT on the graph above) and stocks (represented by SPY on the graph above) held up much better than I expected. I truly underestimated the power of the last bull market/asset mania to carry through this correction. I invested in stocks starting last April, but only for a few months.

Which asset classes will be the winners among these over the next two years? Why do you think so?

The dollar will continue to mount it's mid term comeback (and its inverse, the EUR/USD will continue to decline), albeit not in a straight line... we may be heading for a correction soon (my longer term view here). Stocks and Bonds will be heading to first test, and then break through to new lows likely during this time period. Gold will likely test it's long-standing lower trendline which has support below 700. Whether it does so after another new high or before I will leave to the daily gold bugs.

Three primary reasons for my viewpoints:

  1. Social mood has shifted the human herd significantly, the impact of which cannot be stopped... only delayed (see what really moves markets here).

  2. Round two of deflation in risky assets has begun (Elliott Wave International has a free 13 page report that you might want to read on the subject here). More debt is denominated in US dollars than any other currency in the world. Round two of a run from riskier assets has started with the Euro this time around. Banks and financial institutions had risky asset holders in the world scared during the first round. Stocks, Gold, and Euro all sold in exchange for dollar safety, and to use dollars to pay off dollar denominated debt. We are already starting to see sovereign nations at the center of the start of the next round (see 3 Dire Options for Greece). Longer term, I see severe issues with the dollar...

  3. Long term elliott wave counts on each of these asset classes (binve has a solid long term view of stocks, gold, and the US dollar here). 
What views do you hold for the next two years?

Euro fears = Ending Diagonal Wave 5

With the break this morning through 1.338, it appears that the small degree wave 2 count that has been my primary count since last week (see Tues. March 31st post ) is indeed in play. It also means that the primary and alternate counts I am following are both telling the same story on a short term basis. The primary difference between the two is whether an ending diagonal is in play (see last weeks ending diagonal speculation post ), or a more bearish impulsive count. Clarity on which one is in motion should work itself over the next day... it is a close call between the two given that the correction moved up into a very common ending point for wave 2's... between 50% - 61.8% fibonacci retracement zone, and that we never did get a touchpoint of the upper blue as noted in my speculation last week which would have put the ending diagonal at a much higher probability.

A break through of 1.3459 to the upside would warn that a more complex wave 2 was progressing (and that we may still hit that blue upper channel!).

Even though the trend looks like it is still clearly down, I would be remiss if I did not point out that we are most likely in the ending move (wave 5) of the entire wave down since last November. Once wave 5 is complete, I would expect to see a significant rally. I continue to read more and more articles about the record number of short EUR/USD positions in the market. As a contrarian study by nature, any elliottician reading such news with an almost textbook 5 wave pattern in it's later stages, must prudently consider the risk and manage money tightly.

My longer term EUR/USD count may be worth reviewing at this point to give you some perspective at where wave 5 may take us before a larger corrective rebound that retraces some portion of the down move since November.

Monday, April 5, 2010

EUR/USD in 3 Waves...

Action since last week has been very choppy. The move up from 1.326 does not look impulsive. This is good news for the Euro bears and bad news for the bulls. I have changed the short term counts a bit and the yellow short term trendline (still not a high level of confidence in this channel yet), although neither of these changes significantly affect the forecast. There are numerous ways to label short term counts, but the bottom line is that the move up appears to be of the 3 wave variety.

There may still be more upside, as I still think it is possible for us to reach the upper blue trend channel in a triple diagonal move (see last weeks ending diagonal speculation post), even in the primary overall bearish count I am watching. We may drift lower to touch the yellow in more of an X wave before heading up to an ending Z, but this is very specuylative. 1.3382 is a critical point in the short term counts, and should we breach here, we likely head down to new lows.

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