Saturday, June 28, 2014

Monthly Outlook Update (6/27/14 close)

stocks, bonds, USD, gold

Although stocks keep subdividing higher making marginal record highs, we expect stocks to top before long. Price actions in June introduce some interesting topping scenarios.

[1] An EDT within an EDT since the October 2013 low
The blue count in Chart 1 outlines a large EDT in SP500 since the October 2013 low, which we have been tracking for some time . It is capped at 1974 according to rules of a contracting EDT.  It is possible that the final wave (c)-up of [e]-up is itself a small EDT. See the blue count in Chart 2. Since an EDT is a terminal pattern, we effectively have a small terminal pattern within a large terminal patter, which is fitting for a top.

[2] An EDT since the February 2014 low
A zigzag pullback in June following a three-wave advance since the April low suggests that the Dow may be tracing out an EDT since its February low (Chart 3, upper panel). In fact, this structure can be mapped into SP500 (Chart 3, lower panel). Chart 4 shows this EDT may be the final wave (c) of [Y].

[3] 2014, a year of expanded consolidation
Price actions in the Russell2000 index suggest the possibility that stocks actually topped at the turn of the year and the 2014 gyrations are part of an expanded consolidation that still requires a final major pullback.

Chart 5 (upper panel) shows this structure in RUT and Chart 5 (lower panel) shows how it is mapped into SP500. Chart 6 shows this expanded consolidation may be a wave (4)-down as indicated.

Under this scenario, the Q2 upswing in stocks is wave B-up of this consolidation. Wave C-down is straight ahead. If the bullish sentiment prevails, a lengthy sideways move (triangle or diamond) is likely (for most if not all of 2014). Otherwise, wave C-down is likely to break the February low (1739.66 in SP500). 

Bonds (US long term interest rates)
As discussed in the previous Monthly Outlook Update (5/30/14), the 2014 rally in long term U.S. Treasuries simply reflects the strong trend-line resistance that has guided long term U.S. rates for decades (Chart 7).

The 2014 rally has led 10Y US Treasury yield to retest the green upper EDT line (Chart 7). The retest has been successful so far:

[1] The low in rates at the end of May has held.
[2] 10Y yield rebounded not only off the green upper EDT line in Chart 7 but also off the blue base channel in Chart 8.
[3]As Chart 7 illustrates, any meaningful move in rates will have to breach either the red line or the green line first.

Dollar (USD Index)
Odds continue to favor a higher USD index for the balance of 2014 as long as the green support line in Chart 9 holds. Please see our analysis and discussion in Monthly Outlook Update (5/30/14).

Chart 10 shows that the USD index is retesting the support from a prior EDT for a second time in June.

There's no change to the two key tracking scenarios on Gold. The rally in June is in line with these scenarios. Chart 11 and Chart 12 update and illustrate.

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

Please note that if the market decides to consolidate sideways, a triangle wave (B) is likely concluding and wave E  of (B) is in progress. Gold needs to break above 1400 to invalidate this possibility.

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