Friday, January 3, 2014

MTU Weekend Ed. - Monthly Outlook Update (1/3/14 close)

The following update reflects our near term outlook. For our longer term outlook, please see 2014 Outlook (12/27/13).

The gap down on the first trading session of 2014 and the 1.17% drop in SPX from its record high (1849.44) to Thursday’s low (1827.74) is in line with our longer term view. See 2014 Outlook (12/27/13).

However, our previous analysis on gap dynamics (see This Gap is Different (8/23/13)) suggests that this first gap of 2014 is likely to be filled. If so, odds favor a higher high. In that case, the advance since the June 2013 low ends up as an ending diagonal triangle (Chart 1-green), with a final overthrow still to come.

A well-formed five-wave advance is now in place in the 10-year U.S. Treasury yield from its record low set in 2012 (Chart 2). Wave [v] reaches equality with wave [i] around 3.20% which is about 25bp higher than current yield levels. The entire sell-off will have lasted about a year and a half. A rally lasting six months or longer is likely next once bond yields top.

Chart 3 presents our main bullish (blue) and bearish (red) tracking counts on the USD index. At the moment, both counts suggest near term strength in the dollar. The 83 area appears to be a reasonable target.

Gold is bottoming (Chart 4). The next move is likely an advance towards 1400 to 1550.