Investment Strategy

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Gold losing it’s hue (HUI)

Gold has had arguably one of the most exciting quarters. While the quarter isn’t over yet, we thought we would share some of our views as to where Gold might be headed over the intermediate term.

We start of with a long term quarterly chart to give us some perspective on understanding the price pattern within the context of Gold’s movement over nearly five decades. Our marginally preferred wave count is that we have completed wave (4) in December 2015 and the impulsive move higher from 2015 is Wave 1 of Wave (5). 

The monthly chart magnifies the price action from the beginning of this century and labels the wave count in detail for the move higher. There are several Gann and Fibonacci time and price projections that make Gold one of the most technically driven markets.

The weekly chart is one of our most detailed charts in terms of wave count. Once again the symmetry in the Gold market is simply astounding. From a time symmetry perspective, Wave 1 of Wave (5) and Wave (4) had 1:1 time symmetry of 223 weeks each. We are calling the top of wave 1 of Wave (5) which means that we expect the Gold market to drift lower over the next few weeks/months. 

While the time and price symmetry in the Gold market even on the daily chart is fascinating. A little time and the price action will either confirm or dispel our view.

We further break down the intraday move which was ridiculously volatile to try and confirm that we are in a corrective pattern. The move higher is corrective and we expect Gold to move lower in the next few weeks with our final chart showing another confirmation signal.

To conclude, the HUI index has been showing a very clear divergence with Gold which we think confirms Gold price resolving to the downside.

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Market Diary Feb 14th 2020

I am still of the belief we will see an imminent short term top. As I look at some of the breadth indicators there seems to be minor inherent weakness in stocks.

The Percentage of stocks in the S&P 100 above their 200 day moving average is showing some divergence with the index and the picture is similar in the S&P 500 as seen below.

However, there is no doubt in my mind that the strength in this move has been driven by large cap names in fact the Bullish Percentage of the OEX Index is significantly higher and still in an uptrend for the OEX

while for the SPX Index the same measure of breadth is in a downtrend and about 10 percentage points lower.

As always this seems to be a time of caution - trade well.

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Market Diary Feb 13th 2020

My thoughts on the SPX are that we have possibly completed Wave (3) or Wave 1 of Wave (3). I do not have a strong preference about either of the scenarios.

Nothing here seems to indicate that there is overwhelming evidence we have reached a short term top but it is the vanity in calling a short term top that is so appealing.

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The message of the markets - October 13th 2019

We promised in an earlier blog on September 29th 2019 https://investment-chart-strategy.tumblr.com/post/188036329493/the-message-of-the-markets-sep-29th-2019 to breakdown the DXY as a sum of its parts to figure out whether the individual components of the index were also reiterating what we felt the Elliott Wave count of the Index was telling us. So we will begin with the Euro.

EURUSD

We are of the belief that we are only just starting a multi-month rally in EURUSD that could take us as high as 1.30. While that seems like an impossible target given Europe’s stagnation for over a decade a more reasonable target might be the Euro’s valuation from a purchasing parity perspective. 

The chart suggests that the Euro is about 11.81% undervalued as of August month end. So fair value seems to be around 1.2629 which is fairly close to the minimum 1.30 target. However, the key to remember is that currencies overshoot from being undervalued to overvalued and given the undervaluation currently the chances of an overshoot past 1.2629 are fairly high as historically we have seen this phenomenon.

GBPUSD

Similarly with the Pound we believe there is substantial upside in the pound versus the dollar and our initial minimum target for GBP is in the 1438-1.457 range. Once again this sounds like a formidable target to get to but if we once again use valuation as a gauge and lean back on purchasing parity as seen on the chart below, fair value seems to be at 1.61 using PPI as the measure.

USDCAD

Here to we see USD weakness versus the CAD. At a minimum we expect USDCAD to reach the 1.19-1.21 cluster of support which is around where fair valuation of this currency pair is measured by purchasing parity.

USDSEK

The interesting aspect of USDSEK is that while my conviction isn’t as strong whether we have completed an ABC wave and I will post a more detailed weekly chart below, the overvaluation of USD vs the kroner has never been higher from where I have data, higher than the Plaza accord and the USD bull move at the end of the 1990s. Fair value is at 6.17 versus 9.809 where we close on Friday Oct 11th. 

USDJPY

This is one currency pair where I see USD strength and the implications from this view is that we are in a risk on period as so we see USDJPY will strengthen to a minimum of 1.24. We will leave our discussion here and not talk about USDCHF as that seems for all intents and purposes a managed exchange rate.

As always trade well

[investment-chart-strategy]

S&P 500 update October 3rd 2019

The markets seem to be at a very interesting juncture. Everywhere, I hear recession watch yet at the same time the markets seem to be painting a slightly different picture possibly.

 The S&P 500 has possibly completed Wave (2) of a larger Wave 5 as we can see on the Elliott Wave Analysis that I have marked on this chart.

We will just drill down into the last couple of years taking a closer look at the Elliott Wave analysis breakdown of a daily chart.

We are bullish on US markets.

Trade Well

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DXY an update Oct 1st 2019

We think we have completed an ABC pattern from the lows of Feb 16th 2018. We are expecting to see an impulsive wave to the downside which should take out the downside of 88.25 made on Feb 2018.

While this is just the DXY, and you can find a plethora of opinions on the US dollar, this happens to be an opinion against the developed currencies, EUR, GBP, YEN, CAD, SEK and CHF. 

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Elliott Wave Analysis on a manipulated market

Shorting JGBs also known as a widowmaker probably garnered very little interest today despite seeing one of the largest spikes in yields today over the last few years.

  JGBs have frustrated traders believing that it was only a matter of time before Japanese bond yields would start climbing higher reflecting the vast amount of Government debt issued by the ministry of Finance.  The chart most often cited was Japan Government debt as a percentage of GDP which stands at over 235% for 2018.

While we don’t know if things will eventually unravel we do know that watching the Elliott Wave Pattern unfold in JGBs is a slow painful process. That doesn’t mean I don’t have a view on JGBs as with Bonds and currencies we see patterns form in a series of ABC patterns.

One of the interesting observations is that corrective moves generally tend to be quick and fast versus the moves higher that seem to be more gradual.

On a weekly chart we have seen these moves lower range anywhere from 7-20 weeks and we obviously believe that we are in the middle of what could be a swift fast move lower.

Finally, we look at a breakdown of the last upthrust move in a little more detail on a daily and the corrective move that is unfolding.

We feel that JGBs will endure more pain and we have marked preliminary support clusters on the chart 153.21-153.24 followed by 152.57-152.6 and finally the 151.90 level. This by no means suggests that JGBs could not fall below these levels but for now we will be watching these levels closely. If the BOJ is determined to steepen the yield curve in order to help banks we could see JGBs fall a lot further.

Trade well

[investment-chart-strategy]

The message of the markets - Sep 29th 2019

Today we will focus on the direction of the dollar as it sets a framework for asset allocation across various asset classes.

Let us start with valuation of the dollar and to get some semblance on valuation we turn to purchasing parity which is a useless trading tool but is a fantastic guage for long term value. The DXY index is overvalued when comparing it to the basket of currencies that make up the Index by about 16%.

While we can hypothesize whether momentum in the dollar is slowing or whether this valuation gap we highlighted above will converge, the patterns we are seeing in the DXY Index seem to suggest the possibility of dollar weakness ahead.

Our base case scenario has always been that the DXY completed a bull move on Jan 3rd 2017 and one can argie that the DXY has moved sideways for the last 5 years. There has been some confusion as to how the Elliott Wave pattern was developing from the lows make in Feb 16th 2018 and we have a strong view that we have seen a completion of an ABC ending wave diagonal pattern on September 3rd 2019 that is more clearly labelled on the daily chart below.

A break above 99.37 means we might have to go back to the drawing board and take a look at how the pattern is developing.

Positioning by commercials also seems to confirm that DXY should be headed lower as commercials have generally nailed USD tops by being extremely short in the past and once again they are positioned similarly.

Breadth of DXY versus components is showing signs of weakness despite DXY being near 2 year highs.

Later this week we will break down the sum of the parts of the DXY and as the weeks roll by we will move on to other asset classes and the implications of a weaker dollar on their performance.

Trade well. D

[investment-chart-strategy]

GBPUSD - A Trade Idea

We begin our note today focusing first on the valuation of the pound and in order to guage valuation of any given currency one of the best tools we can use is purchasing parity. What exactly is purchasing parity? Over the long term, the level of prices between two countries trading with each other should converge. While I do not subscribe to using ‘Purchasing Parity’ as a trading tool, because currencies can stay undervalued or overvalued for a long time, on the other hand, over the very long-term currencies always return to purchasing parity. The interesting thing about purchasing parity is that it is a good guage of where one wants to accumulate assets. Buying assets in an undervalued currency is one of the best long-term investment strategies. Currently among developed countries the British Pound offers one of the most compelling undervalued currencies. With the currency trading at 1.2325 with Brexit fears front and centre, current fair value of GBP is at fair distance above at 1.6151.

A directional currency model I use also suggests that the direction of GBP over the short term should be higher. While the model’s track record was exceptional in the past, there seems to be some divergence in the present which I believe will be resolved to the upside in the pound as the model suggests.

A sentiment model we use also suggests that GBP which is insanely unliked could see a fairly decent move higher from these levels.

Since the advent of floating currencies the British Pound has only been lower than these levels during a brief period in 1985, as the US dollar surged against all other currencies while Volker at the Fed was fighting stagflation with the Fed Funds at 9%. This dollar surge eventually led to the ‘Plaza accord’ which saw the dollar devalued against the other major currencies at the time.

I actively use the Elliott Wave methodology especially for currencies, and though this method is fairly subjective, it helps me understand where currencies can potentially move with a clear targets on where I may have to revisit my view. On a monthly Elliott Wave chart that I have labelled below, GBP should begin an impulsive move higher taking us to a minimum price confluence zone of 1.4377-1.4387. 

If one doesn’t believe there are good assets to be purchased in Britain then perhaps here is an alternate way to take advantage of an undervalued British pound by entering into a costless strategy in three years (slight debit). Pricing details are captured on the Bloomberg OVML screen.

I believe this to be a compelling trade idea over the next three years. 

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Long EURUSD - A tactical (speculative) trade

The price action on EURUSD provides us with a speculative short-term tactical trade setup to go long EURUSD. This currency pair is one of the most widely followed and we will try and outline our view as to why this out of consensus trade idea might make sense.

EUR is undervalued by about 8.5% when compared to the US dollar on a price purchasing parity basis.

Positioning on the EUR is fairly bearish, and despite the ECB President Mario Draghi promising a “Do whatever it takes version 2” the Euro hasn’t budged against the dollar. This aspect of no weakness on bearish news should be bullish for EURUSD. Large speculators positioning tends to be coincidental with price and they are most bearish on the Euro since 2016.

Our model for EURUSD suggests that EURUSD has room for upside and we expect price to catch-up with our model just as it has in the past.

Finally, from an Elliott Wave perspective we believe we are just starting to form Wave c of Wave 2 or B and this pattern could take us to 1.1885 or even higher to the 1.2050-1.2075 level.

Go long EURUSD on a move above 1.13 and a stop at 1.1180 and start fading the position and taking profits above 1.178

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Long AUDNZD – The most compelling trade in the currency market

We follow currency pairs around the world because we find there are always opportunities lurking, especially, when one is uncertain about the prospects of other asset classes. While the economies of Australia and New Zealand are both growing, the concerns in the housing sector in both countries is like a beauty pageant for the tallest dwarf.

Our thesis begins with a historical observation. It has usually been very profitable to go Short AUDNZD above 1.33 and go Long AUDNZD when it trades below 1.08.  Currently it is trading at about 1.0442, however the AUDNZD has hovered between 1.00 and 1.15 for the better part of 5 years so what makes this trade compelling now?

Most currency strategists look at interest rate spreads between the two countries as that usually lands up being an effective directional model for the currency. In this case interest rate spreads have mimicked the move in the currency for the most part except from 2016 onwards where this relationship has been marginally less effective.

Very often the drivers of price in currency pairs can be derived by thinking about the drivers of growth in the two economies. 

Another way to look at demand for a currency is to look at the breakdown in exports. In Australia their largest export is Iron Ore.  While in New Zealand it is dairy products.

Breakdown of Australian exports

Source: Observatory of Economic Complexity

Breakdown of New Zealand exports

Source: Observatory of Economic Complexity

There is a meaningful correlation when we plot the exports of the respective countries and advance it by 9 months and we compare that to AUDNZD.

From a technical standpoint AUDNZD had an interesting pattern form. The two moves below AR to ST1 and UT to ST2 in the chart displayed below were very similar in length and time. A pattern that is this geometric, gives technical traders a compelling entry point on the secondary bottom. We have labelled what we believe to be classic signs of a wyckoff accumulation pattern as well.

From an Elliott Wave perspective, AUDNZD is setting up well to move higher on a short term basis to 1.08-1.09 but most likely the minimum target on an intermediate basis is 1.1457-1.1522 or even higher to the 1.19 level.

The broader implications for a trade like this suggest an intermediate term ‘Risk On’ trade that could see several asset classes do well across the world.

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10 Year Bond model - that is more effective than the Copper Gold ratio

I have a lot of respect for Jeffrey Gundlach. He has grown his asset management company Doubleline capital from scratch and is an excellent risk manager. He has made those of us who listen to his conference calls acutely aware of a US 10 Year rate directional model that he uses which is the ratio of Copper and Gold prices. 

This model has been an excellent tool in forecasting the general direction of the US 10 year rate except in 2018. 

 I am proposing a different model that has seemed to work better in forecasting direction of the US 10 year rate. Below is a chart on Jan 8th 2018 when the model was displaying that direction of US 10 year rates would shoot higher dramatically.

The subsequent chart that follows displays how US 10 year rates moved higher rapidly just as the model had predicted.

I will continue to follow the model closely to hopefully sift clues as to direction of the US 10 year rate as it will have implications for several asset classes I follow.

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Nasdaq & DAX at similar positions in Elliott Wave cycle

From the chart above it seems like the Nasdaq has completed Wave (3) of Wave 5 and this count looks very similar to the DAX Elliott Wave count displayed below.

Perhaps we will see a confluence of various charts for a top at the same time which will make finding an uncorrelated market of utmost importance.

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An Elliott Wave update on SPX

Elliott Wave theory is one of the most subjective methods of analysis and yet it does give the analyst a very good clue as to where the collective actions of investors and speculators are in terms of sentiment. A monthly chart of the S&P 500 should pretty much sum up our view but we will continue to drill down time frames right down to the 30 minute chart.

 We next look at pretty much the very same chart on a weekly time frame but we use a logarithmic chart because of the strong upward trajectory in the S&P 500.

The daily chart that follows will look at the price action and the Elliott Wave count in further detail from Wave 4 onwards. From the count labelled below we believe we have just completed Wave (3) of Wave 5.

Finally we will drill down to the minor correction that we have seen from Jan 26th 2018 but look at this from an intra-day perspective.

We have seen a 5 wave impulse move below as labelled above, and the corrective move higher was stopped at the 38.2% retracement level. If the market does move higher we expect the price action to see significant resistance at the resistance zones marked on the chart 2835-2837 level, 2843 and 2850.

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Go Long USDKRW

The USDKRW has completed a complex corrective pattern at support levels. We expect the USDKRW to rally well past the highs of 1244.30 on the weekly chart below. 

This is one of my three top Macro Elliott Wave ideas

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2018 Outlook - DXY

My 2018 outlook will start with the US dollar as that determines how we should position ourselves in the coming year. Last year I posted an Elliott Wave chart on twitter calling the top in the DXY Index on the day of top Jan 3rd 2017,   https://twitter.com/dylan_dcosta/status/816511227115565056 which determined the underperformance of Value vs Growth for the rest of the year.

To reiterate the DXY on the monthly chart above displays the top completed in the first week of January 2017 and we are in the process of completing a 5 wave impulsive move below. The chart below just displays the Elliott Wave count broken down in more detail on a weekly chart.

In the next chart we will take at the DXY on a magnified basis on a daily chart taking a look at the unfolding of the corrective pattern so far.

We see support for the DXY at 90.56-90.66 with further downside support in the 89.12-89.44.

Below is the breakdown of the DXY and the components that make up the index.  We will focus on the Elliott Wave patterns of the FX crosses on just the large weights that make up the index the EUR, JPY, GBP and the CAD that cummulatively make up over 92% of the moves in the DXY.

EUR

The most important aspect of this chart for us is the bounce higher from the first week of January 2017 that is highlighted in the Red Box. We look at the count within the box in far greater detail on the daily EURUSD chart below and we find that it mimics the DXY (not surprisingly) on an inverted basis.

The pattern suggests marginally higher Euro but upside is limited as the EUR is nearing completion of a 5 wave pattern.

JPY

This pattern suggests that the immediate direction is inclined to USD strength. This would also suggest that DXY downside is limited.

GBP

This monthly chart on GBPUSD paints a very clear picture showing that GBP is right at multi-decade resistance. GIven that we have labelled the count as Wave (4) we would expect one last leg going below which is USD getting stronger.

CAD

Finally closer to home we think the Canadian dollar strengthens to 1.14 ish or even below that to the 1.06-1.07 area. We are still a miles away from those levels and I believe the journey to the levels I stated above will be slow and protracted.

While this chart is suggesting long term USD weakness keep in mind it is a small weight in the DXY less than 10% but the message we are getting from this chart is loud and clear. We will surely start to see some inflation metrics start to pick up, or perhaps the possibility of higher oil is here to stay or both.

We will end this week’s note here. My conclusion is that I expect DXY weakness to be short term given the pattern in DXY and EUR. I also expect the weakness in the US dollar to be limited given the possibility of strengthening against the JPY and GBP. Finally the way we are seeing the USDCAD pattern develop suggests we will see inflation pick up in the long run and / or a higher oil price is here to stay.

Dylan

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S&P 500 - May 8th 2017

I am posting a couple of Elliott Wave charts with an update on the pattern I am seeing develop on the S&P 500. This has been a fascinating experience of patience and perseverance in seeing how this pattern is forming and at the end of the day it is still only an exercise of putting the possibility of greater odds in your favour when putting on a trade. Without further ado lets get straight to the charts.

We are working with the assumption that Wave (3) of Wave 5 was completed on March 1st 2017. So to simplify this scenario in baseball analogy we are at the bottom of the eighth inning or at the start of the ninth inning. From March 1st we have seen a corrective pattern to March 27th. We do not have a high degree of confidence if that corrective move was Wave (4) or Wave A of Wave (4). Let us drill down to intra-day chart to see greater detail of how the Elliott Wave count has progressed.

 So at first glance we have seen an abc pattern evolve from March 1st to March 27th. There is great confusion as to whether the move higher from March 27th is an impulsive move part of WAVE (5) or whether it is part of a more complex corrective move from March 1st {Wave B of WAVE (4)}. We are close to completing wave 5 of wave [3 or C] which we feel should be completed around the resistance zone of 2403 - 2406 with 2405 being the preferred high probability level.