Equities
An important top was completed in July 2011 with a break down through the neckline of a head and shoulders formation on August 1st. The chart below shows this also coincided with the break of a trendline stretching back to the February 2009 major low. The minimum downside move suggested by this pattern was fulfilled in short order with a 1000 point fall to the 11,000 level.
Where to from here? It has always been my view that we will revisit the 2009 lows and in fact go much lower before another bull market of major proportions resumes. Robert Prechter, the guru of the Elliotwave principle , has long espoused that we will see the Dow below 1000 (yes one thousand not ten thousand) before the bear market ends. I can’t rule that out either. If the 2009 lows are breached then this becomes a very real possibility.
It also fits in with my view that most major market tops of a mania nature ( which the Dow has been) lose 80- 90% of their value. Don’t believe me? Take a look at the chart of the US technology laden NASDAQ index from a high of 5132 in October 2000. When the dot com bubble burst it took the NASDAQ down to 1108 – fall of over 80%. From its high of near 39,000 in Dec 1989 the Japanese stockmarket still doesn’t seem to have reached a bottom having reached just below 7000 – an 82% drop.
The conditions which I think will contribute to this catastrophic fall in the US stockmarket would lead to a depression, not just the double dip recession some are talking about. Despite inflation being the fear of markets for decades, it will be deflation which this time erodes asset values. We have already seen the precursor to this with the credit problems being experienced worldwide. With that deflation will come falling commodity prices, further debt defaults, and social unrest. It won’t be pretty.
The good news is that those with cash at the bottom will have the chance of a lifetime to purchase assets at bargain prices.
Social Mood
The recent “Occupy Wall Street” protests and other copycats around the world are only the beginning I believe of what will be increasingly violent demonstrations. The main target seems to be corporate greed although it has become a focus for a melting pot of protest groups, particularly in Europe. It’s really just a new outlet for socialist and communist groups and their perverse assumption that the productive in the economy have somehow got there by stealing, cheating and greed rather than innovation and hard work.
The picture below takes a slightly cynical view of the protesters.
However, there is some truth to the argument that the economies of the US and Europe have been mismanaged and the people deceived. The trouble is the targets of the protests should be the governments not the corporations or wealthy individuals. It is the decades of easy money provided by the Federal Reserve and ECB, along with increasing welfare dependence and government subsidies which has created the current unsustainable debt/credit crisis. Those economies have been living beyond their means for far too long and the result shouldn’t be a surprise. As with an individual, you can’t continue tomorrow more and more money beyond your ability to service that borrowing. Eventually you must either increase your income, sell off assets or declare bankruptcy.
Particularly in Europe there is a reluctance on behalf of the public to swallow the bitter pills being offered as solutions by the IMF and more stable countries. They have only themselves to blame for years of government squandering of money and handouts. In some ways I agree with them that the bail-outs of some corporations and economies are immoral, but you can’t blame the businesses and individuals being handed the money. The real villains are the Federal Reserve. Even here in New Zealand it was the Reserve Bank largely responsible for creating and sustaining the property bubble before it burst by keeping interest rates artificially low.
I predict the social unrest will escalate and the darkest days will coincide with the last desperate climax selling in the equities markets. It will be very ugly I fear. Hopefully it will result in a final realisation that government overspending and central banks free money policies were the problem, not the solution and stronger economies will emerge from it.
FTSE 100
The pattern in the Dow is repeated in the UK sharemarket with the important levels represented by the 3 trendlines drawn. I can’t rule out a retest of the neckline at about 5700. The initial target from the head and shoulders top has already been reached but I suspect this is only the very beginning. A drop below recent lows at 4790 would almost certainly see a swift retracement to 2009 lows.
Australia
It’s been a confusing picture in Australia for the past 2 years. Two broadening tops ( one failed) are testament to the uncertainty in the market. However, things have become a little clearer with the second broadening achieving its downside target, a trendline break going back to 2009, and a downside break of what could be a double top. There could well be a rally back up to the lower trendline of the last broadening pattern, before the downtrend resumes. I would be concerned for my bearish scenario if the market makes too much of an inroad back into the broadening area.
New Zealand A small H&S top in may signalled the top in the NZ market around June of this year. The rally since August looks corrective completing an ABC Elliot Wave type rally to resistance ( previous support) near 3400. I can’t say I would have predicted the start of the August rally but the count from the larger March to August H&S top had already been reached around 3150. The larger picture on a monthly chart shows the New Zealand market is in bear mode having dropped out of a large falling wedge which should see a return to 2009 lows. I’d expect one final rally on the daily chart to fall short of 3400 again before the bear trend resumes with a vengeance.
One of the largest components of the New Zealand market is Fletcher Building. A profit warning last week shocked the market and saw Fletchers gap down on large volume. Should the market have seen this coming? Well there hadn’t really been any bottoming pattern although the 2 weeks beforehand did break one or two small resistance levels but volume was very low. On the longer-term chart Fletcher Building has really only just broken the uptrend since 2009. So while there might be a short-term rally back to the edge of the recent gap down, more downside seems more likely after that.
Currencies
USD/YEN
The trend in dollar/yen is undoubtedly still down but the contracting nature of the very large wedge on the weekly chart shows the momentum has slowed on the downside. The inevitable Bank of Japan interventions to sell Yen have had only short term effect .
Certainly a break up above the upper line of the wedge ( if you can call it that)would be a sign the downtrend could be over but as yet there is nothing on the daily chart to suggest this is about to happen. The daily chart looks more likely to test recent lows at 76.00. I breach of that level will be very telling. If the dollar is reluctant to drop sharply it may be a sign a bottom is building.
EUR/USD
The Euro has certainly not been easy to read lately. The weekly chart still looks to be corrective from 2008 and I had thought a break upwards through a trendline from that high in April 2011 had signalled a resumption of a long-term uptrend in the Euro against the dollar however subsequent pull backs below that line have invalidated that move. I had been puzzled by the formation from April to August on an ordinary barchart. It wasn’t until I looked at the weekly line chart below that It became a clearer triangle.
On a daily chart the recent rally looks to have almost run its course, and given I haven’t seen any bullish reversal pattern yet the next medium-term move looks likely to be lower for the Euro.
GBP/USD
The weekly consolidation pattern of the Pound is clear to see from the sideways triangle pattern. The recent break of a wedge within that pattern suggests it wants to revisit the lower boundary. A break of that would be a danger signal for the downside but the 1.4000 level has been consistent support for the pound going back two decades. Conversely of course a significant upside move should ensue from an upside move out of this triangle. Such is the nature of triangles. They are a wait and see pattern.
AUS/USD
The Aussie dollar has taken a year to play out a major top with the break of the trendline and H&S shown below. The neckline was tested soon after the breakout just over 1.0000. The Aussie has regained the 1.0000 level by a small amount but the 0.9000 level still beckons as a first target. The recent fall also coincides with the break of a trendline stretching back to early 2009.
NZD/USD
Commodities
Silver
A small double top announced the recent April high in spot silver. Double tops usually take a little longer to form than this though so it makes me think a more complex top pattern will emerge. The recent triangle consolidation should be watched for a breakout.
Gold
My bullish call from December 2009 below has come to pass and more.
Gold has presented a great trading opportunity with a breakout from a large symmetrical triangle which is also part of a larger consolidation pattern. The breakout looks clean and suggests a minimum upside target of $140/oz higher to about $1115 to $1120. An even more bullish case could be made that the head and shoulders continuation pattern since the beginning of 2008 suggests a $630 rise from the recent breakout to the dizzying heights of $1600. Market Charts – December 2009.
Now though it looks like the game could be up. A nice double top in clear territory broken at 1700 triggered 2 days of the biggest single day falls for many years. The rally since looks laboured and should meet resistance at 1700. I’d be watching for the next break down from the little flag forming with just below 1500 the next target. Note the two tops each contained an outside range day – normally a sign of at least a short term counter-trend move.
Sugar
A head and shoulders top from the beginning of this year has provided resistance at the neckline of that formation, culminating in a type of triple top and almost a H&S which broke down in September. The market retraced to the breakout on low volume and has now resumed the downtrend which has more to go yet.
Copper
A diamond top in Jan to April this year moved into a flat bottom triangle which finally gave way in September. The bottom of that triangle should now provide resistance to any rally. The minimum downside has already been achieved but no reason to buy. Copper is seen as a barometer of world economic growth so not a good sign.
The long uptrend channel from 2009 finally broke in August. The ensuing rally stopped nicely at the lower boundary of that channel. Note the H&S top in March-May but with a disturbing rally back above the neckline. However the right shoulder remained intact. Where to from here? I expect a bit more work around this area before crude retests the 2009 lows around $30 to $40 per barrel coinciding I suspect with the coming meltdown in equities and world economic growth going negative.
Cotton
I keep mentioning hem but they do keep appearing at major tops and bottoms. A classic H&S top in the continuous cotton chart early in 2011 has had devastating consequences – a 50% fall in under a year.. Two failed rallies have ensued and there still looks to be more downside
Interest rates
US Bonds
On a weekly chart US Bonds are in fresh territory with no sign the move is over. While investors shun European bonds, their US equivalent is enjoying safe haven status propelling long-term yields lower. My longer-term view is that US Bonds will also be dumped mercilessly once the US debt also becomes unmanageable. But I should let the charts show that. In the meantime neither the dailies or weeklies show anything but a bull market in US bonds.
US Ten Year Notes
I’m happy to call Ten year notes at least a short-term sell ( interest rates higher) on the basis of this break . Not a huge minimum target on the downside but 126 l0oks likely and is a previous resistance point. The weekly chart however has only just broken out upwards from a very large symmetrical triangle which suggests an eventual 140 target.
