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Dollar, Dow and Deflation

By , Sr. Technical Strategist
10 July 2009 19:36 GMT

Dow Jones Industrial Average

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Stock markets, whether in Europe, Asia, or the United States, all appear headed lower throughout the remainder of 2009.  With global equity markets moving in sync since topping in 2007, a view of the DJIA will suffice.  The decline from the 2007 high above 14,000 was in 5 waves (an impulse) and the recovery from the March low is a corrective 3 wave affair.  Market movements in the direction of the larger trend occur in 5 waves.  Similarly, 3 wave market movements are classified as corrections.  The rally from the low is corrective (in this case a complex correction), and will therefore be entirely retraced.  Is it possible that a larger degree brings the Dow back to 10,000 or so before the larger bear resumes?  Anything is possible but other markets appear to have already turned, which favors the downside from the current juncture.  Also, corrections tend to end near the 4th wave of one less degree, which is the case here (see arrow).  The position of the 200 day SMA (in red) also supports bears.  The smaller chart is a 240 minute bar chart and shows the wave count at a smaller degree of trend.  An acceleration of the decline this month is expected.   

Long Gilt

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Gilt wave structure is clear.  An unorthodox top was made in March (with the stock market bottom) in what is probably wave b of an expanded flat.  Elliott channel support suggests that wave iv is complete and that a rally is probable.  A rally in Gilts means a decline in rates, which is a product of deflation.

Euro Bund

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The Bund pattern is similar to that of the Gilt’s.  The Gilt is lagging the Bund a bit as Elliott channel support pinpointed the wave iv low in the Bund in early June.  The implications are the same though; deflationary.  Expect the rally from the June low to continue over the next several months (for rates to decline).  The rally will not occur in a straight line of course.  In fact, a corrective decline looks probable at this point.  Looking out a bit further; once 5 waves up (in the Bund and Gilt) are complete, both instruments will be vulnerable to tops and reversals.  The market pattern may be suggesting that credit worthiness for these countries will deteriorate, thereby sending rates skyrocketing.     

10 yr. US Treasury Notes

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The price pattern for US treasuries is a bit different but the implications are the same.  Although holding a support line, there are already 5 waves up from the 2006 low.  The 10 yr. topped (rates bottomed) in December and made a secondary top in March (with the bottom in stocks).  A continuation of the rally from the support line fits with the idea of a return to risk aversion.  Further out, the 10 yr. could plunge as the irresponsible fiscal management practiced by the U.S. government reaches a head.     

Silver

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Silver’s wave structure is textbook.  The drop from the March 2008 high to the October 2008 low was in 5 waves, indicating that any subsequent rally should prove corrective.  The rally from 8.65 was corrective and is considered complete at the June high.  Like all markets, the move down will not be in a straight line but rallies should be sold.  Silver is an industrial metal and the bearish forecast spells doom for industrial activity and the economy as a whole.

Euro / US Dollar

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The EURUSD has either already topped or will do so after a rally just above 1.4720 (December 2008 high).  While there are competing scenarios, the next US dollar rally will be a 3rd of a 3rd wave.  In other words, the rally will most likely be the strongest to come along in over a decade.  There are signs that the EURUSD has already topped, including the recent break of the AUDUSD multi-month low.  The pattern tells us that the next wave of debt destruction (and most debt is in US dollars) is just around the corner.  The volume of dollar debt will decrease, sending the value through the roof. 

British Pound / Japanese Yen

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The GBPJPY has enjoyed quite a rally since dropping below 120.00 in January.  However, wave structure suggests that the decline is not over.  A 4th wave correction is most likely complete at the June top and the next leg down will complete wave 3 within a 5 wave decline from the 2007 top.  Again, the decline will not be in a straight line (I am now including the GBPJPY as part of my Daily Technicals coverage) but the main point is that carry is not out of the woods either.  

 

Jamie Saettele publishes Daily Technicals every weekday morning (930 am EST), COT analysis (published Monday mornings), technical analysis of currency crosses throughout the week (EUR on Tuesday, JPY on Wednesday, GBP on Thursday, AUD on Friday), and the DFX Trend Index every day after the NY close.  He is also the author of Sentiment in the Forex Market.  Follow his intraday market commentary at DailyFX Forex Stream.
 
Please send comments about this report to jsaettele@dailyfx.com.

 

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10 July 2009 19:36 GMT