There was an article in Zerohedge at the end of this past week that compelled me to do a long overdue technical analysis of the US Dollar Index. The article is about the work some countries have undertaken to develop and alternative to the SWIFT system, which has been weaponized by the US government against anyone it finds disfavour with.
At the present time, all major international transactions must be done using the American dollar (oil particularly) and any action that reduces the need to use the dollar is deflationary.
We US Dollar chart warns of deflation in the longer term, so the technicals seem to be consistent with the fundamentals. However, the dollar chart is corrective and doesn’t have a huge upside, so this may mean that something else causes a reversal sometime in the future. However, based up the time the dollar takes to move an appreciable distance, that event is likely several years away.
Checking in on The Russell 2000
One of the key indices to watch is IWM (the Russell 2000), which needs a new high.
Above is the 2 hour chart of IWM, the EFT for the Russel 2000. It’s in the final fifth wave which needs a new high in the 161 area, due to the fact that the previous wave down is in three waves and must be fully retraced.
Elliott Wave Basics
Here is a page dedicated to a relatively basic description of the Elliott Wave Principle. You’ll also find a link to the book by Bob Prechter and A. J. Frost.
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US Market Snapshot (based on end-of-week wave structure)
This chart is posted to provide a prediction of future market direction. DO NOT trade based upon the information presented here (certainly NOT from a daily chart).
Above is the daily chart of ES (click to enlarge, as with any of my charts).
The direction remains up in the US indices, but not for much longer. This weekend, I put us in the fourth wave of a larger final fifth wave. The target is above 3000 in ES and could go up to the 3040s.
The wave structure of these waves up from June 3 (in what appears to be the last wave of a broadening top formation — also called a megaphone formation) are not what you'd expect for a final wave of a rally; they're corrective and missing the usual signposts (a broadening top is not an Elliott Wave pattern and it's described in Murphy's well-known and respected book on technical analysis as "an unusually difficult pattern to trade").
This weekend, we may still looking for the bottom of this small fourth wave from Friday.
Once that bottom is in place, we'll be looking for a new high across the SP500, the DOW, the Nasdaq, and all the other NYSE sub-indices. The turn down from that high will lead to what I believe will be five waves down over the balance of the summer to a bottom below 2100 in ES.
I'm expecting the C wave of an expanded flat to the downside. The C wave of an expanded flat has the same outcome as that of a regular flat. It will typically be 100-165% of the length of the A wave. An expanded flat is a regular flat with A B wave that is at least 105% the length of the A wave (it rises 5% above the top of the A wave, in this case, which is has done.
There is an option of a set of zigzags down to the same level. If that's the pattern that traces out, the retraces will not be as strong as they would be with the C wave of a flat. We'll get a lot of information about the most probable path from the first wave down.
The coming drop will be a world-wide phenomenon across all most all sectors. It will last throughout the summer months and most likely culminate in a low and final round of QE.
As I've said since the low on Dec. 26, the waves up are corrective in the NYSE-related indices, and as a result, will completely retrace. Expect an imminent top and a major move to a new low under 2100.
Finally, something often "breaks" at the tops of major rallies, and a new article out today regarding the current status of Deutsche Bank is signalling that we might have the making of another Lehman on our hands. The article is "The Deutsche Bank As You Know It Is No More." Time to pay attention to what's happening on the international banking front.
Summary: Expect an imminent top (week or so, perhaps) to complete this large, corrective "B wave" up from the Dec. 26 low. The overall pattern is a record-breaking broadening top (not an EW pattern).
I'm looking for a dramatic drop in a 4th wave to a new low. ES will eventually target the previous fourth wave area somewhere under 2100.
Once we've completed the fourth wave down, we'll have a long climb to a final new high in a fifth wave of this 500 year cycle top.
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