Stocks, Bonds, Dollar, Gold
Stocks
SP500 squeezed out an all time high (1.2% above the August top) in September when the Fed postponed the anticipated tapering of asset purchases, but is now 2.5% off the high on budget impasse concerns.
While the September high in stocks has the potential to be a major top that threatens the August low for the near term, benchmark indexes have failed to decline in sync and confirm each other. See
Chart 1 to Chart 2. One can spot corrective structures and positive technical divergences with relative ease – a potential near term
bullish wedge in SP500, a triangle in Nasdaq100 and possibly in SP400, and a running flat in Russel2000. While it should be noted that failure of these potentially bullish patterns are bearish, it appears that odds favor a new high before the August low should be breached.
Our near term assessment fits well into the following four larger degree count, which are key scenarios to monitor.
[1- bearish complex double three] We track the advance since the 2009 low in SP500 as a double three followed by a triple three, a [W]-[X]-[Y] cycle wave b-up (
Chart 5). The September high or the coming high is the final wave (c) of [Y]. Near term dynamics as discussed above suggest one more high which likely delivers a typical overthrow - it's nevertheless prudent to be vigilant for signs of a truncated advance.
[2- bearish zigzag] We track the advance since the 2009 low in SP500 as a simple 5-3-5 zigzag (
Chart 6-red). The September high and subsequent retrace raised the possibility of a skewed-triangle final wave (4)-down, which also allowed for waves (4) and (5) to be more proportional to waves (1) and (2) in duration.
Under this interpretation, SP500 is wrapping up wave E-down of the proposed wave (4)-down. The subsequent wave (5)-up is likely to offer more upside potential than scenario [1] discussed above.
Alternatively, one can count a running-flat-like complex wave (4) and expect an extended wave (5) as in
Chart 6-green. The upside implications of the two counts are similar.
[3- bullish regular five] We track the advance since the 2009 low in SP500 as a regular five wave advance (
Chart 7-green). Recent price dynamics allow us to entertain the possibility of an ending diagonal triangle wave 5-up of (3)-up.
Under this interpretation, the current pullback is wave [iv]-down of 5-up of (3)-up, which fits well with near term wave structures in Nasdaq100 and Russell2000.
[4- bullish ending diagonal triangle] We track the advance since the 2009 low in SP500 as a large ending diagonal triangle fifth wave (
Chart 7-red). Based on the wave count in
Chart 5 above, the September high or the pending high marks the end of wave [C]-up and the subsequent wave [D]-down should bring SP500 to below 1400 to overlap with wave [A]-up. The final wave [E]-up should push stocks to new highs.
Bonds
Bonds rallied decisively in September on lack of any tapering of the existing stimulative monetary policy (
Chart 8). Technically, 10-year UST yields have respected a long term prior support area which has turned resistance as discussed in the last Monthly Outlook (
Chart 9).
The current rally in bonds or drop in yields tracks
[1] a 4th wave correction if the bull market in bonds ended in 2012 (
Chart 8 green, Chart 9 green) or
[2] wave E of a final ending diagonal triangle which should push long-term rates to new lows (
Chart 8 red, Chart 9 blue).
In either case, yields are now approaching our initial target. A short term backup is likely.
U.S. Dollar
We anticipated near term weakness in USD in Monthly Outlook Update (8/30/12) and the market did not disappoint (compare
Chart 10 below to
this chart.)
Our long term count on the US Dollar index has not changed (
Chart 11). Price actions are in line with our expectation that the USD index remains range bound for some time as indicated.
Gold
The 10% pullback in Gold from its late August high after a visual three-wave rebound raises the prospects of a retest of the June low if not more. Most of our tracking count remain intact (
Chart 12):
[blue] a potential ending diagonal triangle wave [5]-up, with (B)-down
in progress and (C)-up, (D)-down and (E)-up yet to come. The proposed EDT could also be wave (1) of [5]-up.
[blue-alt] a large ABC rebound with B-down in progress and C-up yet to come.
[red, green] a wave five-down in progress.
