Value Wave

The 5 wave impact


11 months ago I first pointed out the concept of "An asset class shift". The last few months have been the most interesting not just because of the end of QE but the announcements that have come out of Japan. Their intentions have convinced everyone on the Long dollar trade and the Long USDJPY and the rush into global equities. But as happens with some events they come in at a time when everyone is already all in. As EW studies show the government is the biggest crowd. They act on mass opinions of the voters and bureaucracy and after consensus is built. So its not surprising that they cause trend changes.

We often draw classic conclusions based on old economic theory, like if I print a trillion dollars the currency will collapse. I think The greatest financial innovation of our times, of the last quarter or century or so is free floating currencies. No more does a currency devaluation have to mean the announcement of a lower exchange rate. It has nothing to do with it. A devaluation is the expansion of the underlying asset like doubling the currency base, the exchange rate only reflects demand and supply. This new distinction that was introduced does not allow for making analogies about the outcome. For this reason money printing might not always be = hyper inflation at least not right away. So even after QE3 is over, the hyper-inflationists are killed and money sits in banks, and the consensus call for end of the dollar has become a consensus call for rise of the dollar. But the dollar is just an exchange rate of money as understood by the forex markets. A rate at which you can exchange dollars for something else. Similarly is the case for inflation.

So the announcement of a Japanese style QE, has not yet been followed by calls for hyper-inflation but that its the right thing to do to save the world. And convinced everyone that the JPY is going to keep falling to hell. But does that mean I should go out and short the JPY today. Now that its become a consensus trade?

Making direct correlations about event 1 = event 2, no longer works in this environment becaue the exchange rate reflects demand and supply and the movment of money accross borders. If the US prints money and the money goes abroad like it did before 2008 the a falling dollar index reflects it. But trillions afterwards if it sits in banks and not lent out, the dollar index goes up. That the dollar is worthless is theoretical, and yes to the extent prices of goods withing the US have risen, inflation has reduced the purchasing power of the dollar. Same will be the case with the Japanese. Their purchasing power is at risk. But that does not mean that the JPY will fall in a straight line? Probably not. It might sit there for a while. And in fact if you look at the chart of the USDJPY below expect the opposite.


The currency pair bottomed in 2011 after a long term 5 wave decline. It coincided with a commodities top, and right now as the consenus is for a JPY collapse its going to push back the most since. The chart above shows a completed 5 waves up that I will mark as wave A which means that wave B can retrace 61.8% in either a zig-zag [a-b-c] or a triangle pattern. That can push it back to 91.4. The entire move up has consumed 3 years so wave B can take at least a year if not longer to unfold.

So when QE3 was announced the CRB index topped and has been falling ever since, and equities have risen. So now that QE3 has ended and Japan is going out of its way the question is where will the money shift? Of couse a lot is going to go directly to the pension funds. Who will be then paying it out to retirees, and hopefully investing some of it in global equities. But that is a process. The markets have already moved in anticipation of many of these things and may respoind differently here on. What good is money that you print which simply leaves your shores? Japan itself would like to see that money work its way around the economy. In fact given the situation the Nikkie should be a better investment over time so why go anywhere else? I cant pin down the fundamental reason why the above will happen but its the likely scenario based on the current wave structure.

The same is also true of many other markets at the moment. A year back when an asset class shift meant that money would go into commodities. The CRB index was at 275 it later went up to 312 by April and stayed there for some time. Now its fallen back to 265 that is 3.6% below where I wrote about it the first time. In the mean time, because, some commodities like crude and silver have fallen much harder the sentiment towards commodity prices in general has reached an extreme like seen at major market bottoms. The CRB index however is still above and in fact kissing the 61.8% retracement leve as shown below.


Since there are many fractals within the post 2011 pattern its possible to fit the move into both bullish and besrish scenarios, and based on the situation you should choose accordingly. So while its possible to mark the 5 wave decline from June 2014 as wave 1 and expect only a bounce/pull back, the above structure is compelling and should be given a thought. The extreme in sentime at 61.8%, allows for the alternate to play out so does it on many individual commodities as I discuss later. So CRB index might have completed wave B of an up trend that started in 2009 and now the final wave C up might start. That can be an almost mini bull market in most commodities in the year ahead if true. Who is going to gobble up commodities? Remember this chart from last years Kf report.


Dollar Folly

Because the dollar rose in the final days of the 2008 crisis along with falling commodities, the rising dollar has been since associated with deflation risk off and other similar relationships. But why something happened or will happen can change with time. Note that during the initial period of the 2008 equity bear market the dollar was actually falling and gold going up till March 2008. Can I then say that when US equities go down, the dollar falls because money goes out of the US. Some US based Research houses were recently associating the rising dollar with money going out of risky places like Russia China and the Middle east due to geopolitical tensions. So what would a falling dollar mean? 

Yes the dollar has been going up for months and after extreme sentiment readings for some time now counts as a perfect 5 wave rise and ready for its first meaningful correction. Now because its broken out of a H&S pattern I would hope that the downside is limited. but a correction in price or time in wave 2 of 3 is what we are looking at. Here is the short term wave count

And the weekly charts wave count. Here wave 2 of 3 can pull back to the neckline or the wave 4 of lower degree or 38.2% retracement, target 85.3-84.5.

Now the reason I am spending time on the dollar is that it is coinciding with wave 5 developments in many commodities that were falling for quite some time especially gold and silver. So I am going over all of them.

Gold - yes the most interesting since Jan of this year as it made multiple bottoms at 1180 and then broke it. And the break is followed by obituaries. But that is exactly the thing you would like to see at a major bottom. Gold is now close to its manufacturing cost so that is a value proposition. But that said the technical picture is very bullish for the months ahead. First look at the long term chart, Long term readers already know how I like momentum cycles to complete back to below zero. And in case of gold that has happened shown as the green indicator below. Secondly prices have fallen back to the 40 quarter moving average. So from this support I would usually expect an up trend for the next few quarters. The question is whether this is a retracement bottom or the start of a new bull market in gold.


Those of you who are EWI readers will only expect a retracement but just like their Dow count for 2000-2003 was wrongly marked as 1-2-1-2 violating a lot of their own rules in the book EWP, which is why the Y2K top was surpassed, so is the case with Gold. To me there is no way expect a lot of wave fitting that the fall in gold is 5 waves. So I would like to disagree with marking the 2011-2014 decline in gold as 5 waves but as W-X-Y-X-Z. Now while that too is 5 waves down it is 3-3-3-3-3 in structure. Again that does not mean that we cant be in a bear market in gold. The next move would be a larger degree X if its only a retracement. Then it would be a complex correction. 1528$ is the 50% retracement target for the next few quarters. But because the 2011-2014 decline is a complex correction and bottomed near the 40 quarter average with completed cycles, there is good reason why the correction to the 2001-2011 bull run in gold is over and a similar size bull market in gold to 9000$ can now start. By the time you get to 1528 there will be enough evidence on which case is playing out. I am just keeping you informed that there is no reason why a bull market in gold cannot start, the set up has everything I have seen in the past at the start of major trends. In MCX terms a rise to 1528$ along with a move in USDINR to 90 at some point, my long term target, means that mcx gold will remain in an even bigger up trend just like it did from 1984-1995. Do the math and you will be closer to Rs. 300,000 for gold in India.

Here is the wave count for the 2009-2014 period. The last few months completed the final 5 waves down in wave C of Z.


Some of you might ask me how can gold go up if the dollar is to go up. Good question, Answer: the next correction in the dollar from a 95% bulls reading on surveys, is going to be the most important. Look at the dollar chart below again and see the alternate count possibility, that has not yet been ruled out. A-B-C from the 2011 bottom, completes a bearish triangle. Let the market tell us what is going on here. Right now its important to let the dollar fall and commodities rise again for some time and see what structure they take. Hyperinflation or deflation, which comes first is still not answered by the market, till then its all theory. A move above 90 [the 2009 high] would rule out this alternate completely.


So which other commodities are 5 waves. Crude

Crude completed what looks like a 5 wave decline since June and part of what can be an A-B-C down from the 2011 high. Yes it possible as shown below to mark the chart of crude with similar waves as the CRB index. Wave B is a triangle that completed in 2014. The recent 5 wave decline will certainly get retraced, if it does so in 5 waves up we know that something bigger is going on. The falling trendline from 2008 is at 105$ which would be a long term hurdle. 61.8% of the 5 wave decline is at 94.5$. The bullish case is for a move above 105 towards 150. What fundamental logic will make these things possible only time will tell. The classical logic is failing so far. So by now the whole world thinks there is so much crude oil around that the price can never rise. Dont be fooled by such logic. In 2001-02 crude moved up from 17 to 25 I wrote it would go to 35 and higher. I was told that at 35 India would shut down. Crude went on to 90 and Sensex to 20000. So much for classic logic. Right now is a time to look at the bullish possibilities small or big lets see.


Copper? Yes that one forgotton animal. It did move up a bit from last years low and if you did not notice it is still above that level. In other words copper prices are making a higher bottom while the world of commodities is in panic. It is holding the 78.6% retracement. This makes the case for copper even better. So I did post this out of the world possibility for copper that I would like to consider. The base case is for a bounce back in a small wave c of an a-b-c advance that started last year. That can take it to 3.40-3.45$ at the most. The more bullish scenario would be to expect a 61.8% retracement of the 2011-2013 decline up to 3.9-4.0$. The most optimistic would be to mark 2008-2015 as a wedge and expect wave E to kiss the upper trendline before a top near 5.28$.


Dazed and Confused? for so long its not true, ...LED Zeppelin 

Just when the whole world is come to expect rising dollar and falling commodities the exact opposite in the near term appears almost certain. That gives us time to figure out if its going to turn out as big as some of the bullish alternate wave counts suggest in this report. Most commodities in fact like copper gold and crude have not broken their respective 40 quarter ema [only silver did], so that has become a great support for the time being. Another sentiment extreme was also reached in the Bond markets with a bullish consensus on rising bond prices [or falling yields] in the US. I have often written, contrary to popular belief that the Indian G Sec 10 year does not show a completed wave pattern and therefore yields here too are likely to rise before the rate cycle turns. Saying this today when WPI is published at below 2% is a little wild. RBI would be under intense pressure to cut rates.

What will actually transpire we will see, but the set up today is many markets about to reverse their previous trends. A bottom in commodities, a top in bonds, a top in the dollar. Are we looking at higher rates and inflation? And in all that where are equities. Looking at the 2007 top there was a clear pattern where a falling Dow was accompanied by a falling dollar till March 2008, and then it stayed down there till July, only to rise afterwards. That gave commodities time to fly up. Money moved out of stocks into commodities as suggested by the E/C/B chart right at the beginning. When US markets top will we see the same again. A top in US stocks would send overseas money that has poured into the safety of US markets rushing out again causing the dollar to fall. Falling bonds would also have the same effect. And the safety of Gold at these levels makes a great case for buying that instead. The case for a large asset class shift is not smaller but even bigger today than ever. 

So far equities remain the main winning asset class. Will the rise of commodities become the cause of a shift in asset class. Falling equities with a fallind dollar index and rising gold sounds perfect right now.


Value Wave


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The Value Wave Stock

The Value Wave Stocks is an identification of stocks on the above model that are likely to progress upwards along the path of the 5 wave impulse pattern over a 2-5 year time horizon. With the market itself today in an advanced bull phase various stocks are at different degrees of the wave structure shown above. What therefore is critical is finding new ideas that are at an early stage within the pattern and attempting to participate in the move. The difficult part is that most investors [or should I say traders] do not have the patience or time horizon required to get the best out of unfolding pattern. Since time is a less exact study of the subject of technical analysis there are times when the upward moves have unfolded very fast and others where it has taken peoples patience before rewarding them. All the same if the identification is right the move unfolds sooner than later. Using this model its possible to plot the correct Elliot wave structure on a stock and confirming it with the current state of the business based on published data like the Audited annual report and quarterly results and news about the business. Because growth is a 3rd phase phenomena it requires no research but the patience of a long term investor.

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