Friday, October 3, 2014

MTU Weekend Ed. - Monthly Outlook Update (10/3/14)

stocks, bonds, USD, gold

The September sell-off in stocks found support at the 2009-2011 trend line (Chart 1) and rebounded strongly this past Thursday and Friday. As another time window for a high in stocks approaches, we are on alert for a confirmation of the (September) top (Chart 2 blue) or the potential occurrence of a top over the next few weeks (Chart 2 green, red).

If a top does register, we expect the SP500 to probe the 1650-1750 area before the bull market resumes, and eventually much lower if the bull run is over. Here are the two long term scenarios.

[bull run over] The advance since the 2009 low is an ABC move, where wave C began in 2011. Chart 3 tracks the proposed wave C as a triple-three. Note that the first (whole) week of October represents a timed-window for a high. Typical tolerance is +/- week or month.

[a 4th wave pullback] Chart 4 tracks a regular five wave advance since the 2009 low. Once wave (3) ends, the wave (4) pullback is likely to test the 1650-1750 area before a wave (5) up to new highs.

As Chart 5 illustrates, the 10-year U.S. Treasury yield index continued to be trapped between two long term trend lines (red and green). The price structures in 2014is likely a bull flag.  Squiggles in Chart 6 suggests that 10-year yield is likely wrapping up a corrective decline. On balance, the next major move in long term rates is likely to have an upward bias.

The strong advance in the USD index since its May 2014 low presents two key longer term scenarios outlined in Chart 7.
[blue] Despite the strength in the USD, recent advance is part of a complex wave C of a multi-year bearish triangle. If so, prior highs of 88.19 and 88.71 need to hold. Expect wave D-down and wave E-up to follow.
[green] The USD index breaks out to new recovery highs, as wave (C) of an upward flat progresses. In this case, the USD index has a chance to hit 100.

The Fibonacci 3-year anniversary (since its 2011 top) came and went and Gold continued its slide, most conspicuously in USD terms. More over, this past Friday's $25-drop put a 15-month support to serious test. A triple-digit price tag awaits if this support gives in for good. And the next Fibonacci anniversary is not in sight until late 2016. See Chart 8.

Is there any wave basis, among other factors, to be be bullish on Gold? Given the dramatic move in the USD, our traditional examination of Gold priced in multiple currencies shed some light (Chart 9). To the extent that Gold, as a physical asset, can move independently, recent declines in gold prices could be the tail end of a wave B pullback across several currency denominations. If so, expect a strong wave C-up next.

In short, keep an eye on two scenarios:
[1] a meaningful break of support established since July 2013, across several currency denominations
[2] a trend reversal representing a wave C advance