EW Update - Friday, December 29, 2000..
The DOW pushed to 10917 intraday today, into the resistance area of 10850-10950 we cited in Wednesday's Update. Yesterday, the continuation of the near-term rally turned a seven wave advance into a nine wave advance. Nine waves equals an impulse wave. So we label the rally from 10299 (Dec. 21) to today's 10917 intraday high as a "five" wave move. If so, then this advance is likely wave 'c' of a flat correction, topping within the acceptable time limits that our January 1-4 Fibonacci turn window allows (remember it's +/- one day). This count implies that the next significant move should be a steep decline to start January that draws the index toward the October low of 9654 and below. For Tuesday, more than likely there will be a pop higher at the open as investors return from their holiday vacations. Yet as long as the Dow remains below 10900, odds are that some degree of top has been recorded at today's 10917 high. Thus we would view any rally at Tuesday's open as an opportunity to position for further selling pressure next week.
In contrast, a strong push above 11007 (Nov. 6 high) would invoke an alternate interpretation of price action. The alternate view of the near-term pattern suggests that the five-wave rise from the December 21 lows could be part of a large B wave that carries the index back toward its old all-time high of 11750. We will discuss this alternate in more depth if the Dow rallies above 11007. Right now we are bearish and the B wave scenario is lower probability.
Above we have published two charts detailing both of our Fibonacci turn windows for the month of January. The turn window at the end of the month is more elegant based on the relationship to prior waves. Because we have not see the type of capitulation in sentiment and momentum that normally accompanies lasting stock market bottoms, we will assume that the late January turn will mark a stock market low. But I think next week's market action could go a long way in confirming or invalidating our assumption. So stay tuned.
Wavers, for Tuesday we will turn bearish the Dow on any rally to 10825 or higher. If this stance is elected, we will place our initial stop at 10900. If this stance is not elected, then we will see what opportunities are on hand by Wednesday's Update.
The March S&P 500 appears to have topped in the middle of our cited resistance area of 1337.80-1366.50 in futures (1316-1346.44 in cash). While we cannot yet eliminate the possibility that prices may have one more surge up on Tuesday prior to falling in earnest, that probability will remain low as long as today's 1356 high remains intact (1340.10 in cash). Our confidence will increase that a short-to-intermediate-term top has been seen once the futures close below 1303 (1286 in cash). Then, we would look for a continued sell-off to new lows. Our initial downside support of 1251.50 in the daily continuation contract still is out there; it should be tested at a minimum. In contrast, a close above 1382 in futures, 1360 in cash ( the 78.6% retracement of the decline from the December 11 high), negates the short-term bearish outlook and indicates a larger rally is underway, back above the December 11 peaks. We hold to our bearish outlook for the S&P indexes against a close above these levels.
The NASDAQ continue to act poorly. The rally from the most recent lows in the OTC indexes looks like a "three," which is a countertrend move. This implies new lows to come, likely next week. Also notice in the chart above how the NASDAQ 100 cash index has acted in its decline from the September 1 high. Each time this very methodical stair-step sell-off has breached a round number such as 3500, 3000 and most recently 2500, the 100 cash index has rallied back to test this "breakdown" level before falling off to the next one. This is evident on the chart. This morning's high of 2577 was a test of the 2500 breakdown and if this pattern holds going forward, the next move should be a decline toward the next round number of 2000. Moreover, the NASDAQ still has not closed up more than two consecutive days in a row since the September 1 high. As long as these two patterns remain intact, the trend must be considered down. If the NASDAQ Composite manages to close up three days in a row, and/or the 100 cash index is able to closes solidly above 2500 for more than two days in a row, then odds that an intermediate-term low is in place will greatly increase. The Composite still has key near-term resistance of 2870 (78.6% retracement of the decline from the December 11 high). A close above this level implies a low and multi-week advance. But based on the near-term swings as show in our chart, we currently remain bearish the OTC indexes.
The near-term trend in March Bonds is bearish. In recent Updates we've been listing all the reasons why we thought bonds were on the verge of reversing their trend from up to down. These included the excessive bullish sentiment, the seven up weeks in a row and most recently the small-degree five wave decline from the 105^23 high (Dec. 26). Notice on our short term chart that March bonds broke below the uptrend line that has contained prices since the November 8 low. Bonds then rallied back tested the underside of this broken trendline, which is a common occurrence. The next significant move should be down in prices and up in yields. Since it is theoretically possible to count the entire rally from the January low of 89^00 (6.75%) as complete, a short-term decline now could turn into an intermediate-to-long-term decline. It is too early to forecast this potential with any degree of confidence, but we mention it so at least we are aware of the downside possibilities. For the next week or two bond prices should fall toward a test of our first listed Fibonacci support of 102^29. Subsequent support is 102^01, with more bearish potential if this level is breached. If our outlook is wrong and bonds instead push back above 105^23, then look for a run toward higher resistance of 107^07 (5.14%-5.23%), the 78.6% retracement of Primary wave 1 down from the October 1998 high. Wavers, per our analysis on Wednesday night, we turned bearish bonds yesterday (Thursday) when they rallied to 105^04 at approximately 8:35 am Eastern. We are going to lower our stop to 105^15 based on the wave pattern. Bonds should not even get close to this stop level if our wave labels are correct. On any decline to 104^02 or below, we will lower our stop to breakeven.
The U.S. Dollar Index remains bearish. The index should easily achieve our next support of 104.82-108.18, which includes a previous fourth wave low (equivalent support basis the daily continuation contract is 104.82-108.14). As our chart above indicates, near term the dollar should undergo a bounce, as wave (iii) from 115.18 (Dec. 13) comes to a conclusion. This bounce would be a fourth wave and lead to more selling pressure once complete. Key resistance is now 112.79 (112.64 in futures), the bottom of a first wave of one larger degree. As long as these levels are not breached, we remain confident that the path for the dollar index is ultimate lower. Wavers, we turned bearish the March futures at 112.40 (Dec. 20). Tonight we are raising our stop level to 112.65, one tick above the bottom of a previous first wave. Prices have no business being near this stop if our wave labels are correct.
The XAU has traced out a clear five waves up from 41.61 (Oct. 25 low) to 53.23 (Dec. 21 high). We label this rise wave 'a' of an 'a'-'b'-'c' rally that will ultimately carry higher and constitute Minor wave 4 when complete. Wave 'b' is underway from the 53.23 high and should fall into our previously listed support of 47.42-48.79, at a minimum. So the overall trend for the next week remains down for gold and silver stocks. Our goal is to identify the bottom of wave 'b,' which should allow us to turn near-term bullish gold and silver stocks in anticipation of a wave 'c' rally. Since wave 'b' down does not yet appear over, the operative word will be patience for the coming week. A stock like American Barrick Corp. (SYMBOL: ABX), should pullback into at least the 14 3/4-15 3/8, as wave 'b' unfolds. Once we see the end of the decline, we will alert you in these pages. So stay tuned.
February Gold never was able to push above $277.80 (Dec. 7) before succumbing to near-term selling pressure. The decline from Wednesday's $277.50 high to today's $272.30 low traced out five waves. Since this pattern does not appear to be a flat (i.e. bullish), odds are that another five wave decline lies ahead, and thus further downside action. So the price action of the past two days means that our view from Wednesday must be suspended, which was that a pullback would afford us an opportunity to turn near-term bullish. The Elliott wave pattern since the $266.20 (Oct. 27) low remains open to various interpretations. At this point, we will sit back and wait until the pattern clears enough to make a confident short-term forecast.
March Silver declined to a new low today, beneath 462.0 (Dec. 19). There is no change in the fact that sentiment is bullish but the near-term Elliott wave pattern is not. A small-degree five wave rally from today's 460.5 low may change that, but until we see one, the one larger degree remains down. As with gold, at the present juncture there appear to be better opportunities elsewhere.
Happy New Year!
Steven Hochberg, Editor
elliottwave.com
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