Sunday, July 31, 2011

MTU Weekend Ed. - Reading the Impasse (7/29/11 Close)

The continued debt ceiling impasse has finally got a number of asset markets spooked - stocks, precious metals(gold), bonds and USD-crosses in particular. It is widely reported that the U.S. stock market has just suffered the largest weekly loss in over a year and short term financing markets have begun to be stressed.

U.S. Stocks - range bound but range busting to be
Oil supply shock, Japanese nuclear crisis, euro-area sovereign debt crisis and the U.S. debt ceiling impasse have kept stocks range-bound for all of 2011 so far. At 1292.28, SP500 is now sandwiched between its most recent high of 1347 and its 200-day moving average of 1284.84, awaiting a breakout.

Chart 1 presents the top tracking counts. Please also see squiggle counts on SPX and ES in the appendix.

The primary count (subjective) expects the range to hold with the current decline being a 2nd wave retrace (blue). Expect a breakout to new highs shortly.

A moderately bearish alternative (red) allows for continued consolidation to a lower low in the form of a large W-X-Y structure, perhaps to bring the QE fractal to completion (Chart 2). In this case, odds favor a fresh round of monetary stimulus - QE3.

If the hope rally decides to come to an end, we’ll call the late July high a truncated top (Chart 1, purple).

Gold (in USD and euro) - topping

Gold (as priced in USD) is wrapping up a five-wave (impulse wave) advance since its 2008 financial crisis low (Chart 3). The blue count allows for one more consolidation and upward push while the red count has the a top in sight. When the reversal takes place, the downside target is around 1150.

Gold (as priced in euro) is also topping (Chart 4). The blue count places gold in wave [iii]-up of 5-up while the red count depicts a contracting ending diagonal.

It is interesting to note that Gold perhaps has more upside potential relative to euro than to USD with respect to the impulse wave advance since its 2008 financial crisis low. If so, look out for relative euro weakness within this final stretch.

Bonds (10Y US Treasuries) - recount but still toppingThe recent rally pushed long term Treasury yields to fresh 2011 lows. This development invalidated the previously proposed flat and calls for a recount - Chart 5 presents a triple three count for the 10-year U.S. Treasury yield. Accordingly, a major top in long term Treasuries remains within sight.

Appendix - Squiggles