Sunday, January 1, 2012

MTU Weekend Ed. - 2012 Outlook (12/30/2011 Close)

Happy 2012!

The following discussion offers a subjective outlook on some key markets from an Elliott Wave (EWP) perspective. EWP rules and guidelines and macroeconomic analysis help clarify the (relative) likelihood of competing scenarios (counts). Primary counts reflect the assessed odds on U.S. stocks and long bond, gold priced in USD, NYMEX crude oil and USD per Euro.  Let's see how much this outlook pans out in a year's time.  

U.S. stocks
Odds favor the 2011 low in U.S. stocks to be breached, sooner rather than later, before an advance to new highs.

In EWP terms, SPX is likely tracing out an ending diagonal triangle from its 2009 low, following the completion of a decade long flat correction. The 2011 high is likely wave [A]-up of the proposed EDT. Currently, wave [B]-down is in progress. Wave (C)-down of wave [B]-down will likely breach (or at least retest) the 2011 low. See the blue primary count in Chart 1.

Chart 2
offers a more detailed short term count to support the validity of the primary count. Note that the minimum requirement for wave (B)-up of wave [B]-down has already been met, although a deeper retrace is probable.

The accompanying macro development is likely to be (relative) liquidity contraction and expansion (i.e. capital flows) among financial assets.



U.S. long bond
The 30-year U.S. treasury bond is wrapping up a three-decade long advance.

The accompanying macro development is likely to be continued policy-driven low rates in the mean time but QE-fatigue thereafter, and eventually reflationary expectations. 

In EWP terms, the bull market in the U.S. long bond has traced out a complex three: double zigzag - triangle - double zigzag - triangle - double zigzag. See Chart 3. See the section titled "Bond, Rhythmic Bond" in Points of Recognition (10/28/2011) for a more detailed discussion.

Although the minimum requirement of a top has been met by virtue of a higher high, prices may advance (spike?) to the upper trend channel.

Gold priced in USD
The correction in gold prices since mid-2011 is likely approaching its end, if it is not already over. Following a new high in gold prices, a more meaningful top is likely to form.

The accompanying macro development is likely driven by perception of the "endless debasing" of paper currencies and continued and perhaps escalating geopolitical tension.

In EWP terms, the 2011 high in gold prices is wave [iii]-up of 3-up with respect to the 2008 low. The pullback in recent months is wave [iv]-down of 3-up. Expect wave [v]-up of 3-up to materialize in 2012. See the blue primary count in Chart 4.

Odds shift to the red alternative count in Chart 4 if the decline in gold prices accelerates.

Crude Oil (NYMEX)
NYMEX crude oil ($WTIC) prices are likely to rebound higher before a major top develops.  Once the top forms, the 2008 low is likely to be breached over time.

The accompanying macro development is likely that of continued and perhaps escalating geopolitical tension.

In EWP terms, $WTIC has been retracing its 2008 crash along the path of a potential triple zigzag. See the green primary count in Chart 5. Wave A-up of the final zigzag was complete at the Q4 2011 high. Once wave B-down is over, wave C-up to new recovery highs will complete the proposed triple zigzag. Note that wave B-down may be complete or may enjoy a deeper retrace.

Odds shift to the blue alternative count in Chart 5 if $WTIC breaches its 2011 low without making a new new recovery high.

USD per Euro
Since the traditional U.S. dollar index is heavily dominated by its euro component, a view on EURUSD likely offers a better signal-to-noise ratio. 
 
The euro has been consolidating with respect to the USD since its 2008 low. This multi-year sideways consolidation likely has not ended.

In EWP terms, EURUSD is wrapping up a multi-year triangle wave [B], with a final wave (E)-up of the triangle to surface once the current decline ends. See the blue primary count in Chart 6.

Once the triangle is complete, a steady march toward parity is likely to follow. Since the prior wave [4] and wave (4) of [3], as labeled, are both above parity, it would not be a surprise if EURUSD bottoms somewhere above parity.

Odds shift to the red alternative count in Chart 6 if EURUSD drops below 119.13 before a meaningful rebound.

The accompanying macro development is likely that of a tenacious but ultimately futile global effort to kick the can down the road with respect to the European sovereign debt crisis.

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