Friday, May 2, 2014

Monthly Outlook Update (5/2/14 close)

Stocks, Bonds, USD and Gold

SP500 is likely to deliver the proposed overthrow to complete a potential ending diagonal triangle (Chart 1 and see past weekend commentaries for additional discussion). The late-April all-time high in the transports (Chart 2) and another all-time high in the SP500 advance-decline line (Chart 3) continue to support advances in stocks.

At the moment, the index is stuck in a resistance area which has so kept a lid on advances (Chart 4).

SP500 needs to break above this resistance area in order to maintain the upward momentum or otherwise risk a pullback or more. Price actions over the first two days of May may be interpreted as a retest of potential support illustrated in Chart 5. Should this support fail, we could see a retest of the 50-day moving average (around 1860), the 1850 area, or worse.

If symmetry is to be respected, as Chart 4 illustrates, the 2nd right shoulder of a potential inverse head-and-double-shoulder pattern sits around the 1850 area. The iH2S pattern could fail altogether, which will likely introduce meaningful downside potential. One only needs to examine price patterns around the 2011 top for a precedence (Chart 6).

10-year U.S. Treasury yield ran into formidable long term resistance dating back to the late 1980s at the beginning of the year, and has so far unable to break above(Chart 7).

We are tracking two near term scenarios as illustrated in Chart 8. The green count has the 10Y yield wrapping up a sideways 4th wave, in anticipation of a 5th wave breakout to higher yields. The red count points to a fast rally as wave [c] or [iii] to lower yield. If the classic bear flag formation turns out to be successful, the measured target is around 2.35% area.

The USD index has returned to the middle of its medium term support and resistance as indicated by the blue trend lines in Chart 9.

The dollar index has been making higher lows during a 2+-year consolidation, as highlighted by the green line and circle in Chart 9. One possibility is that the consolidation is nearing its end and another attempt to break above 85 is due.

Another possibility is a continued trip towards support around 75.

The near term counts in Chart 10 track these two scenarios.

Two intermediate term scenarios stand out at the moment based on recent price actions of Gold in USD and other currencies. Chart 11 tracks

[red] an initial low at the beginning of 2013, followed by an upward flat whose C wave has the potential to extend.

[green] an orthodox low at the end of 2013. Whether it is the low won't be confirmed for a while.

Chart 12 shows our near term tracking of these scenarios.