No Comments Written by Anthony Truong on April 27, 2008 – 1:04 am

My apologies; although the US Fed will be meeting early next week to decide on interest rates, they won’t actually be releasing their decision til Wednesday (not Monday, as I mentioned in my last update). This gives us a few more days for markets to top, which would be more ideal, given recent choppy action.

I have attached updated charts of gold, silver (this time labelled tentatively) and the EURUSD (note that I have not altered the directional arrows; markets have just happened to follow my forecast quite well).

The issue with these markets is that on an intermediate term basis, they have been moving in the opposite direction to US equities; this has changed in the last few days of trade, with all markets seemingly well correlated. So it is difficult to tell how they will react when the Fed decision is announced. Initially, I had the expectation that they would form a temporary bottom in wave B (unlabelled) of the current wave 2 correction, and upon the Fed’s release, gold/silver/EURUSD would rally strongly to complete wave C (unlabelled) of wave 2. However, given that specifically gold and EURUSD seem to have completed their respective wave B of 2 (with perhaps a little lower to go to hit support), it may be the case that these markets rally into Wednesday, complete their wave 2 corrections before plummeting following the Fed release. This is of course based on a simple A-B-C correction.

I have attached two S&P500 charts; one shows market action of the past year or so, emphasising the 1-2, 1-2 nature of the decline and the W-X-Y complex correction that we are currently seeing in wave 2 – the Stochastic indicator below this chart also shows periods of time when this momentum indicator was overbought (red boxes), i.e. above the upper blue line in the indicator.

The second chart is essentially the same, but with red boxes highlighting where prices were when Stochastics were overbought.

You will notice that a significant decline followed soon after a Stochastic overbought signal; if the decline did not take this indicator back down to an oversold level (i.e. below the lower blue line in the indicator), but instead rebounded, this usually lead to a modest new high but with a more severe drop immediately after.

So here is why I believe that a significant decline is due at the least, if not a full blown 3rd of 3rd wave.

1. Stochastics have made three successive tops in the overbought region through March and April, with a 4th top forming now/early next week; each of these tops did not lead the Stochastic indicator back down into the oversold area, but instead bounced back up to form new highs in price. Stochastics are due for a decline soon to take the indicator back into oversold territory, to relieve the overbought reading.

2. We have a bearish divergence in both the Stochastics and Price Oscillator (see down sloping blue line drawn at the current reading of both indicators), even though prices have made new high after new high throughout this overlapping correction.

3. MACD and Relative Strength Index are struggling to gain momentum; despite new highs, each of their highs are relatively flat.

4. S&P500 price has struggled four times since early February to surpass the 1400 level; this shows that an enormous amount of resistance sits at this level, that will most likely turn prices away again.

5. We have a completed Elliott Wave structure, although very complex; W was a double zig-zag; X was a single (odd looking) zig-zag; Y was a double zig-zag.

6. Both the Dow and S&P500 are coming up to challenge the (purple) trendlines drawn off the all time highs of last October and the 2nd wave high in December. Further to this, the Dow is also coming up against trendlines drawn from the 1982 low and the 2003 low, which rejected two prior rallies during February (not shown in this update).

7. CBOE Put/Call ratio has been below 1 for an extended period of time, indicating that there have been more bulls than bears.

8. The CBOE VIX index is below its 20 day and 40 day moving averages, and is at its lowest level for 2008, indicating increased complacency towards stocks (not shown in this update).

At the moment, the short term wave structure is ambiguous, so I can’t really comment on when a top will form in prices. It could be an ending diagonal, as we’ve had a 3 wave rally, followed by a 3 wave correction, but that would be hypothesising. I am expecting a top in the hours before or immediately following the Fed’s rate decision, so come mid-week, prices should start the first leg down of an extended decline.

Looking for a turning point at 1410-1415 in S&P500 and 13000 in the Dow.