THE THREE MUSKETEERS
The three "Financial market" musketeers, the dollar-gold-stock markets, appear to be
at very important long term turning points. From an Elliott wave and Technical
perspective, it appears very likely that the U.S. Dollar index and stock market are
reaching major tops, while gold-silver-XAU are completing major secondary lows. If
one looks at the long term dollar index chart overlayed the S&P 500 index, you can
see on a long term basis just how high a correlation there is and has been between
these two markets. That is easy to understand as one of the major supports of the
huge Bull market has been a strong dollar, and how it has helped attract vast amounts
of foreign funds, one of the major underpinnings of this Bull market in stocks.
The stronger dollar has also kept the U.S inflation rate relatively low if one even
believes the U.S. inflation figures ( another time ) , while Europe is beginning to see the
unfavorable inflation effects of having their currency so weak, especially when oil is
priced in dollars, they get a "double whammy" in the inflationary effects of the huge
rally we've seen in crude oil prices. It is amazing to see the U.S. dollar strength in light
of the huge trade deficits the U.S is running. Foreigners have huge amounts of dollars
and much of that has been funneled into the U.S. stock market, it's great for the stock
market while this situation continues to occur, but I strongly believe we are reaching
"critical mass", the point where foreign money stops pouring into the U.S. and its huge
asset bubble, and the dollar begins to erode, which in my opinion is inevitable, and
that process gets exacerbated when the stock market begins to unravel. Remember, it
is a two-edged sword. That is what I view as the fundamental outlook, there are many
excellent articles on this Gold-eagle forum that will explain all the interrelationships
much better than I can. However, what I can do is take a look at the big picture Ewave
patterns and discern that major turns are very likely, very soon.
When I came to this forum at the beginning of the year I said I expected a major low in
gold and the XAU in the first few months of the year. It appears that scenario is being
stretched a little "time wise", but not price wise. All my work points to a major
secondary bottom in gold in the 270-280 zone, ideally around 275 basis the nearby
Futures contract. The initial Bull Market leg in gold in my opinion was the rally from
the low 250s in Sep/Oct of last year to the high at 339. It now looks like we are very
close to completing the second leg of a corrective decline, with the nearby gold
contract possibly trading marginally below the 276.20 level.
From these lows I expect at least a rally above the $350 level in the next 3-6 months,
very possibly up towards the $410-420 level. By the way the initial retracement of the
first leg of a bull market is usually quite involved in terms of price and time, this one
fits very nicely into that category. The XAU has a very complex and convoluted, but
interesting pattern. I believe the first Bull Market leg in the XAU occurred in Aug/Sep of
1998 ( 48.67 to 87.53 ) . The decline into Mar. of 1999 I label as Wave "A", the rally from
that low to the highs seen in Sept. of 1999 looks to be a "B" wave rally ( which can
carry to a new rally high ) , and this current decline appears to be completing the "C"
wave, of what in Ewave terms is an ABC irregular flat correction. Ideally the XAU
would marginally take out the Mar. 99 low at 56.44, then bottom and explode to the
upside. Also the 2-3 year basing pattern in the XAU at this 50-60 level is a classic big
picture bottoming formation, supplying the "base" from which a huge Bull market can
and often does unfold. This is NOT where we should look at the day to day or hourly
to hourly fluctuations, we're in the bottom of the 9th inning in my view, and the risk
reward of buying gold-silver-XAU at or marginally below current levels, is about all one
can ask for on a risk/reward basis.
The dollar index appears to be completing a long term corrective rally process from its
lows seen in August of 1992 at the 79 level. The entire pattern from that low indicates
that a corrective rally is very likely near completion. Daily charts indicate one more
rally up towards the DXY ( dollar index ) cash 107 level "might" be in the cards. Any
decline and close below the DXY cash 102 level, is a strong indication that a very
important long term top has been made.
While this most recent stock market rally has seen the S&P make new all time highs,
and the NYSE almost finally getting above the high seen in July of last year, the
evidence strongly suggests these are completion rallies, not beginnings of new big up
legs. And even recent highs in the OTC and Nasdaq 100 indices have seen continued
internal technical deterioration, and bigger picture Ewave patterns look to be near
completion. Trying to pick or predict a top in the U.S. stock market has been a very
difficult endeavor at best. However, the dollar chart interpretation along with the
metals, I think gives us good insight that the overall stock market is again ready to
make an important top. I'm looking for a series of perhaps one or two more marginal
new highs in the S&P in the days and weeks ahead. And then there should be some
excellent shorting opportunities as this rallies momentum is beginning to wane. Keep
in mind that I do not believe we will see a big rally in the Precious Metals until the
market declines substantially, especially in the Tech sector, as the market simply
"sucks" in all money, and no one has any interest in the metals area.
With the huge credit excesses and debt loads we are seeing, the bubble in the
market, who knows what levels of derivatives, the RISK in the Financial markets is
HUGE. I believe Mr. Greenspan, although afraid of the bubble, also is very afraid what
will happen if and when it finally pops. I think it is now beyond his control as the whole
scenario has been allowed to go on MUCH too long, and even the five interest rate
hikes have done little to stop the market. I think no matter how you slice it, it will end
very ugly. Gold appears "technically ready" for a huge rally, and I think ultimately a lot
of money will flow the metals way. Again, timing is always the key, I think we are close
to major trend changes. But the stock market has surprised the Bears more times than
I care to recall. Will this finally be it? Only time will tell, but major changes appear to
be drawing inexorably closer.
Wave Signals Commentary
Mike Drakulich 3-28-00 |
