Elliott Wave Update ~ 28 June 2013

Friday, June 28, 2013

Today's bearish price action in the last 30 minutes of trading has been a continuation of a trend of selling into strength that has been occurring according to Sentiment Trader's "Smart Money Index".

Their explanation is as follows:

"The idea behind this indicator, popularized by money manager Don Hays and existing with many variations, is that emotional trading takes place at the beginning of the trading day (as traders react to overnight news event and economic releases) while the "smart money" takes the day to evaluate price action and input their orders before the market closes. 

Due to that assumed tendency, we want to bet against the opening action and bet with the closing action.  The way we calculate the index is to subtract the performance of the S&P 500 cash index during the first ½ hour of trading and to add the performance of the S&P during the last hour."

This chart does not yet reflect today's price action, but you get the idea: The SMI has been declining quite persistently since July of 2012!

So the nightly futures ramps has allowed big money to "sell everything that is not nailed down" during the course of the normal trading hours.

The wave count:

Weekly shows a "backtest" (and perhaps failed) of the up trend channel.

Amazingly, on a monthly time scale, the market is still very much in overbought territory. Note the double negative divergence of the RSI over a period of 15+ years.  And since we are looking at a monthly chart, this would be a valid technical observation for such a timeframe. Also note the drop in volume since 2009.

(By the way, its the first monthly decline in 9 months!)

And finally, all the Federal Reserve members have been out there "jawboning" for the past week since Bernanke hinted at tapering.  Some have seemed incredulous that the market "over" reacted the way it did.  The hubris of them all is telling. That they think and talk about how they should be able to control rates or markets is a bearish signal.  The Fed is the biggest player yes, but the world markets still dwarf them overall.

30 year bond prices. I've had this wedge shape for many months on this chart.  Yes sentiment on bonds are low, but we all know there could be a "panic" bottom yet to come. Has there yet been a "panic" in bonds?  

This Gold chart, which I have had in place for a long time, looked ridiculous just not too long ago. Yes it held up longer in a great distribution pattern, but eventually broke down. Sentiment is again low as in bonds. 

The paper gold price is leveraged 100:1 perhaps.  Why wouldn't it suffer as anything else?  Can you redeem a gold ETF for physical? No of course not. So what makes it any different and subject to price delcine? Gold is also subject of random government confiscation and price controls.  

Hypothetical scenario: Lets say you bought 100 ounces of physical gold at $1800 = $180,000. Now lets say Gold eventually goes to $500 in a deflationary collapse and the dollar index soars to 200 (lets just say double at 160). Your gold will be worth just $50,000 in nominal terms and only $25,000 or less in real terms.  

And god forbid if the government then wants to confiscate it.  At that moment in time, you're not a happy camper huh? Refuse to turn in your gold and you may be branded a "criminal".  Gah!

I love physical gold but the odds are always stacked against us. The little guy never can seem to win. I am not trying to talk anyone out of their investment either physical or either paper!  I am just saying, what you cannot imagine could happen, and may indeed happen. The wave count suggests a major [A]-[B]-[C] decline is on the way.  And if you can ride that out, I commend you.

For it is in the future hyperinflation (after the credit collapse) that gold should really shine. But again, it may be outlawed by then.

Dollar is still poised for a surprise rapid advance upwards. It too has been lagging far longer than originally thought. But sellers seem to be exhausted.  A Google websearch for the term "destroy the dollar" gets 23,400,000 returns. Its not dollars that will get destroyed first, its the bonds that are backed by dollars.

Bonds would sell first wouldn't they in a credit collapse? It always seemed so obvious to me. Yes, at some point the dollar will be deemed "just paper" but before then, bonds are just promises of paper. We need to go through a deflationary credit collapse first.  Dollar should reign supreme during that collapse. Only after the collapse is "complete" will they be able to produce hyperinflation, and that seems a long ways (years) off.