Friday, May 30, 2014

MTU Weekend Ed. - Monthly Outlook Update (5/30/14)

stocks, bonds, USD, gold

The overthrow surge of the proposed ending diagonal triangle in SP500 is indeed in progress (Chart 1 and see past weekend commentaries for additional discussion). The most recent small-degree upswing, which counts as wave (c) of [e] of the proposed EDT, is nearing completion (Chart 2).

Moreover, bullish tracking counts of SP500 and the Dow Transports since their 2009 lows also show potential major turning points ahead (Chart 3 and Chart 4).  While one should have patience for the topping process to run its course, selling opportunities are now emerging.

Bonds (US long term interest rates)
The staying power and the magnitude of the rally in U.S. Treasuries this year have surprised many market experts as well as economists. For example, the rally in the 10-year Treasuries is now 5 months and 60-some basis points and counting (Chart 5).

There have been a flood of disparate explanations for the slide in yields in recent weeks, from macro analysis, positioning, to supply and demand, an understandable development whenever experts are befuddled. What experts likely have failed to (fully) appreciate may be as simple as the long term trend in bonds (Chart 6).

We could not help but observing the following. See Chart 6.

[1] The market clearly has respected the red downward trend-line for decades. The 2014 rally, which "coincidentally" began at the same trend-line, is no exception.
[2] One can now count a 13-wave decline in long term interest rates from their early 1980s peak to the 2012 trough. As such, we may have a cycle low in rates since a 13-wave structure is consistent with a completed impulse wave according to Elliott Wave Theory. Furthermore, the tail end of the decline may be a (terminal) ending diagonal triangle as outlined by the green trend-lines.
[3] Rates are now retesting the green upper EDT line, a previous resistance factor but a potential current support.

In short, rates were "hammered" down by their long term resistance at the beginning of the year and now face potential support from a busted prior resistance.

To help market timing, we highlight additional support for 10-year yields on the daily chart (Chart 5).
[1] 10Y yields are now retesting the base channel indicated by the blue lines.
[2] The move off a bear flag appears complete or nearly complete, as indicated by the red lines. But also note the unfilled gap just below the current level.
[3] Friday's low sits around a Fibonacci 0.382 retrace of the upswing in yields from their 2012 bottom.

We are to witness whether the 2013 breakout in rates were successful. Odds appear to favor rates initiating their next upswing soon.

Dollar (USD Index)

We observed in Monthly Outlook Update (5/2/14) that "The dollar index has been making higher lows during a 2-plus-year consolidation,... One possibility is that the consolidation is nearing its end and another attempt to break above 85 is due."

This past month's price action further supports the bullish scenario.
[1] Chart 7 shows that the green trend-line as again supported the USD index during the most recent sell-off. In doing so, a potential head-and-shoulders structure most likely has failed to deliver. This development is bullish.
[2] The decline in the USD index since last November may be a terminal ending diagonal triangle (Chart 8). The index indeed broke above this potential EDT and is now retesting the breakout trend-line. This development is bullish.

Odds favor a higher USD index for the balance of the 2014, as long as the green support line holds. A decisive breach of the green support line brings would resurrect the bearish head-and-shoulders scenario.

There is no change on our view on Gold (see Monthly Outlook Update (5/2/14)). Chart 9 and Chart 10 update and illustrate.

[red] an initial low at the beginning of 2013, followed by an upward flat whose C wave has the potential to extend. 

[green] an orthodox low at the end of 2013. Whether it is the low won't be confirmed for a while.

In both scenarios,  the recent break down in Gold prices counts as a small-degree 2nd wave retrace.  A drop below the 2013 low would invalidate these scenarios, while the inability to break above the 2014 high on the next upswing would result in a bearish triangle off the 2013 low.