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Sunday, November 7, 2010

Weekend Update 11/6/10 - markets at a crossroads

The election results on Tuesday combined with the FOMC announcements Wednesday really put the ES in retro rocket mode.  I've modified my EW count some from the last time I posted it, but the bottom line remains the same: we are in a 5th wave to the rally that started in late August.  The market  is due a breather, and it ended the week on an overbought note.  The question is will it develop into something more serious than a breather.
As you can see, this count has Minor Wave 4 ending with wave "e" of a triangle at Monday PM's low.  That's followed by Minute 1 and 2 (green) into the dip following the FOMC news on Wednesday PM, with Minute W 3 in progress (and quite possibly complete) since then.  That would leave Minute 4 and 5 waves yet to conclude Minor Wave 5 and also the Intermediate wave that started at the August lows.
The alternative is that the rally extends, that is certainly possible - there is a seasonal up bias at this time of year. 
Barring the alternative and assuming the above count is correct, there are two possibilities upon the conclusion of the current Intermediate Wave.
The first is that Jul 6 low marked the conclusion of Primary Wave B of an X wave, with the market currently in Primary Wave C of that move. The rally from late August is Intermediate Wave 3 of a 5 wave structure that started at that Jul 6 low. As such, we should see an Intermediate Wave 4 corrective sequence followed by a final Intermediate 5.  Intermediate 4 should carry down to the area of Minor Wave 4, which would be the ES 1170 to 1180 area. 
ES Intermediate Alternate 1

The second intermediate term possibility is that the rally from late August is Intermediate Wave C of a 3 wave move from the Jul 6 low.  In this view, the Jul 6 low only marked the end of Major Wave A of Primary Wave B.  The idea is that Primary Wave B is tracing out a 3 legged flat type of correction, with the B leg close to done and thus the C leg soon to follow.  The C leg target at a minimum should reach the A leg low of Jul 6 around ES 1000, with a more likely target somewhere below that level.
ES Intermediate Alternate 2

Of course, if the current Intermediate wave continues it's upward march from here in the form of an extended wave then the flat correction alternative goes out the window.

I've some Elliott Wave analysis on the EUR.  First up is a long term chart for perspective:

The first thing to know about currencies is that they tend to behave more like commodiies than equities from a long term perspective.  Equities in the long term move in 5 wave impulses whereas currencies and commodities tend to move in 3 wave cycles.
The second thing to know concerns time cycles.  Tony Caldero has done some excellent work on currency cycles  He has determined that there appears to be a 17 year cycle in currencies.  There is not a long term history on currencies, they've only been floating for 40 years, so if there is a longer cycle it's not readily apparent as of yet.
The last 17 year currency top (vs. the US$) was in 1995, so currencies in general are due for a long term top sometime in the next two years, ideally in 2012.  The last bottom was 2002, and the EUR bottomed with all the others.  Since that low, the EUR has traced out one Primary A-B-C sequence which topped in 2008, followed by an "X" wave bottom during the crash in the fall of 2008 which ushered in the start of a new Primary A-B-C sequence that is currently in progress.  That Primary sequence had an A leg top in in late 2009 followed by a B leg bottom in early June of this year, so that we are currently in the final Primary C wave rally sequence of the pattern.
C waves in corrections are 3rd waves, and as such tend to have some power.  This one is turning out to be of that sort, as can be seen in the steepness of the slope since the early June lows.

From a shorter term perspective, it looks like the EUR has concluded (or is close to ending) Intermediate Wave 3 of the first wave up from the Primary B bottom.  The sideways track from the top of Oct 15 through Monday (Nov 1) of this last week is pretty clearly a triangle W 4.  Triangles in this position always precede the last wave of a move, and there are a distinct 5 waves up into Thursday's highs followed by a steep drop off into the close Friday.  If this count is correct, we have started an Intermediate W 4 correction which should see lows in the area of the prior 4th wave of one degree lower, which would be the 1.37 to 1.38 area.  Finally, Intermediate W2 took the form of a zig-zag, so this W4 should be either another triangle or a flat.  

One final word on the EUR : there is a very possible alternate long term count which I will present at a future date.

Gold is at a crossroads.  There are two alternates here with very different implications.

 Alternate 1
 Daily Chart

Hourly Chart

In this view, gold finished it's fifth sequence of Wave 1 - 2's of ever decreasing degree with the lows of Oct 22.   Doesn't seem likely, but it is possible. 

Alternate 2
Daily Chart

Hourly Chart

Alternate 2 has Minute W 3 (green) complete at the highs of Oct 14 and the "a" leg of a flat type correction done as of the lows of Oct 22.  The "b" leg of that flat is either done as of Friday's highs or close to done.  That should be followed by a "c" leg to complete Minute W 4 with a target low in the 1275 to 1300 area.

Alternate 2 seems the more likely here.  Recent news with respect to Gold indicates that fundamental supply/demand pressures that have been bullish in the last year or so are now neutral at best.  That means that the primary driver of gold prices at this point is the value of the US$.  If the preceding EUR analysis is correct, then it would indicate that the US$ is about to rally which would be bearish for Gold.  Incidentally, and probably not coincidentally, a US$ rally also would apply downward pressure to equities and thus the ES.

So we are at a crossroads across the board.
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