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Wednesday, October 6, 2010

Elliott Wave Update ~ 6 October [Update 8:24PM]

[Update 8:24PM:  Another comparison between oil's parabola and gold. I believe gold is entering its red zone phase. Gold bugs have wanted and wished for this for many years and I think its finally here. Ironically many gold bugs are in somewhat denial that its here.   But hey ride the wave you earned it!

It makes sense when I heard Paulson the hedge fund guy was getting into gold in early 2010, I kinda had in my mind that I better just let it play out as it has.  I certainly don't think its yet topped although for a long term sustainment it would be better if it had a nice correction and kept plugging away.

Unfortunately, I think its reached the turbo stage and we might be only part way in the turbo gear. Or we might be halfway in. EWI has some nice Fib targets that lie around $35 above here. We'll see. Certainly a sharp rally in the dollar may kill gold outright. We'll see.

I'm looking for contrarian indicators like a magazine cover shouting how gold is king. EWI pointed one out in the EWFF newsletter buy saying Central banks sold at the bottom in 2001-2003 and have now halted sales (presumably near a top).

However the much anticipated "public participation phase" I think is overblown.  The retail public is not going to buy gold on leverage at least not like housing or tech stocks.  They weren't out buying oil contracts in 2008 after all  (But they did buy small cars and dump their gas guzzlers in droves)

Middle America is broke after all.  They will look at Gold and get envious but do they have money to buy? After all you are not really able to effectively nor easily invest in gold in most 401k's, IRA's etc. If you can its not for the average investor.

But different? Nah. I think its just another trade to the big boys that push the big money.  When the time is right, they'll dump and turn the trade just like any other.  And when is that? When the last greater fool is in so-to-speak.  Sure some public may jump on the bandwagon but if you haven't noticed, middle America is broke and likely to be selling their gold rather than buying.

Its the central banks that can eat dirt here. And anyone who doesn't carefully consider that they are trading pieces of paper promises that cannot possibly be honored, not real gold.  Keep your physical safe, but be wary of Wall Street yes?
[Update 6:55PM: Some of my favorite charts. the NYAD and BPSPX. Both align with the idea of this being a Minor 2.

NYAD I am looking for a move (soon) back to the lower channel line for either a wave 4 or a solid break under the line could mean be a reversal. A breach of wave 1 of (5) price peak would be required first (around 100K). Hey it seems to make great waves so I count it.
BPSPX chart is interesting. I placed a trendline and its remarkable so many wave two's align on it.   The RSI is very mature in development. Sure it can go higher but the trade is getting stretched.]
[Update 5:03PM: Updated dollar chart.]

If your in the Minor wave 2 camp of looking at things, then we certainly have enough waves and enough of a retrace. Now its just a matter of looking for a turn down the other way. That means looking for evidence of a 5 wave structure impulse down.

Looking at a cross-section of various indexes, we are looking for valid 5 wave impulse structures down.  The NASDAQ and QQQQ's may be sporting such a structure as I label below. It could be that the NASDAQ peels away first. Divergences such as this are the norm at significant rally highs.

So the chart seems to suggest the SPX and DJIA will make new recovery highs above yesterday's highs because they lack 5 wave impulses down but that the NASDAQ may not.  Thats looking at it from a pure wave standpoint.
Again using the total market chart, the Wilshire5000, we can see if there was ever a near "perfect" spot for a wave 2 to turn, we are about there.

Time, price, waveform, trendlines, technicals and sentiment all support the notion of a hard turn. As far as "news" we now have earnings season at our doorstep.

When back in July I suggested a giant Leading Diagonal Triangle for the market, I said the retrace should be deep. In fact according to Elliott Wave Principles (Frost/Prechter) the retrace can be 78.6% Fibonacci. Had I held to this view since the early July rebound it would have guided us better. Well he we are.

In a strong bull market, a simple RSI divergence can mean nothing. The hourly chart does show divergence on the RSI.  If a rush of buyers do not come in and take it over next resistance, the market must hang in a shallow trading range above recent breakout of yesterday.  Its a lot to ask for a market that has rallied so much in such a little time.

A wave 2 will fail here at this challenge area as it used up all its ammo to get here.
But its simple: If the market has enough juice (and lack of big selling) to get over next resistance (which is the mass market sell decision point number 1) and hold who are we to say its not right? The market is always right and if it means to make a new high above 1219 SPX then we cannot stop it.

Personally I think the DJIA might tag 11000 one last time and that may be a trigger for a selloff.   We'll see.

The "experts" said the SPX was priced for 5% GDP growth last time it was this high earlier in the year.  I am not hearing any of that on this go around.  The experts all pondered an "exit strategy" for the Fed last time the market was heading this high. Now all we hear is "how much they will continue to monetize"  All we hear is about the "FED put" and the dollar getting crushed. Its the same psychology of May/early June 2008 when commodities peaked last time on Intermediate wave (2) of Primary wave [1] of cycle wave c.

So this go-around the psychology is different. And in light of the fact we live in a Ponzi nightmare, its remarkable we maintain any positive attitude to equity "assets" at all.   We conjured up the thought and now that "thought" (FED will save the day always) has now gained so much traction that anything less may be a shock.  Or even the fact that the FED just may well throw another trillion at the MDS/Treasury market may also be a shock. After all, if they pull the trigger that would be a recognition that we are truly hosed and perhaps the beginning of the end. 

And it might be the greatest sell the news in the history of everything.

At any day, long positions could open to a lock limit down situation.

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