Stocks, Bonds, USD, Gold - key intermediate term scenarios to watch
U.S. stocks appear ready for a pullback in early Q2. The structure of this potential pullback is likely significant to our interpretation of the larger price structure.
Despite a very impressive 265-point rally in SP500 since its February low, the upswing appears more consistant with a series of three-wave advances as shown in Chart S1. These three-wave advances started overlapping this past week as upside momentum waned (Chart S1, red #7 to #9). This type of price action raises the possibility that the upswing might be a flat-like corrective structure:
(red) double zigzag A-up, zigzag B-down, EDT C-up
(blue) zigzag A-up, zigzag B-down, triple-three C-up
Under this interprenation, SP500 is likely experience a meaningful pullback, targeting the base of these EDT like structures around 1970-2020 and 1890-1970 or more.
Chart S2 presents a bullish impulse wave count of the upswing, placing SP500 around the end of a third wave (green). A wave four pullback to 2020 looks likely also.
Bonds rallied on Fed and growth expectations in March, further fulfilling the right shoulder of a potential head-and-shoulder pattern in 10y UST yields (Chart B1).
This large H&S pattern has already lasted about 4 years and targets a new cycle low in long term rates if fully developed.
Moreover, a potential small H&S pattern has developed in the right shoulder of this large H&S pattern. 10Y yields have already been rejected by its overhead neckline (Chart B2).
Do bond investors know something stock investors have underappreciated or is the bond rally just a manifestation of cheap money?
The USD index lost more than 4% in March and the decline appears to be wedging (Chart $1). Meanwhile, price actions since the 2015 peak fits that of a triangle (Chart $2). USD strength is therefore likely to surface in Q2.
Gold is correcting an impressive upswing from its 2015 low. A potential short-term head-and-shoulders pattern targets the 1130 area. See Chart G1.
With respect to the selloff from the 2011 peak in Gold, we are monitoring a completed ABC pullback (green) or a couple of incomplete triple threes (red and gray). See Chart G2. In these scenarios, recent Gold rally is merely wave C of an upward flat (Chart G1 red) and expect lower lows.
Note that Gold is currently retesting the green wedge breakout line in Chart G2. This line can be a key support if there is enough bullish sentiment, especially if the low is already in. On the other hand, a decisive breach of this support would help fulfill the bearish H&S pattern target.