Friday, November 19, 2010

MTU Weekend Ed. - Fourth Wave Consolidations (11/19/10 Close)

Stocks, gold and USD have been more or less in sync recently. This is intuitive as a major driver of late is the initial front-running of QE2 and the subsequent reaction to the actual announcement.

The weekend commentary highlights the potential for a simultaneous fourth wave consolidation in these asset classes, and "fat-tail" risks. The fat-tail risks are (1) that the fourth wave consolidation has already completed, and (2) that the proposed fourth wave is actually the beginning of a trend change (i.e. the top / bottom is already in at the recent price extremes.)

A potential common development across stocks, gold and USD is that they are all experiencing a fourth wave consolidation from their respective recent price extremes. Stocks and gold have been correcting downward and USD is correcting upward. Moreover, the potential fourth waves in gold and USD are flats and are satisfactorily alternating with the second wave zigzags. (Chart 1, 2 and 3).

If these are fourth waves, the fourth wave flats in gold and USD appear complete . Stocks too? In particular, the recent high in USD is bumping against the second wave low (red count in the USD chart). There lies the risk/potential that the pullback for stocks may be over as well. Note that stocks did trace out a small-degree five wave advance from the recent low.

In global markets, Canada's TSX is one of the best candidates to illustrate the risk/potential that the proposed 4th wave correction could already be over (Chart 4 and Chart 5). In addition, Germany's DAX may already be in its 5th wave; India's BSE and UK's FTSE may have completed its 4th wave flat if the current advance has not topped.

At the other end of the spectrum, the risk/potential that the top/bottom may already be in at recent price extremes. The green count in the USD chart updates the bullish nested 1s2s count. The red count in the Gold chart updates the somewhat rushed completion of minor wave 5. If so, the recent trend-bucking "retracement" is actually the beginning of a new trend. There lies the risk/potential that stocks have topped as well (the red count in the SPX chart). In addition, as mentioned before, the recent nominal high in stocks was registered in a fibonacci 89th week since the March 2009 low (Chart 6).

Chart 7 presents a creative yet valid initial impulse wave down from the high in the Dow mini. The same count can be mapped into the SP500 mini as a leading diagonal due to a slight 1-4 overlap. As of Friday's close, the wave [ii]-up rebound has take about 50% of the time and retraced about 50% of the decline. The primary count under this interpretation is for a deeper retrace to finish the zigzag, although wav [ii]-up can end anytime as we may have a flat-x-small zigzag going.