Equities Sell Off to Begin the New Year

Amid extreme complacency and optimism in the first week of the new year, US markets sold off of Elliott Wave primary degree final targets and Fibonacci convergence. The S&P has hit the upper limit at 1849 which is the Fibonacci convergence zone that started back from the Oct 2007 intermediate B wave high at 1576. This limit is the 2.618% extension of the move down from the April 2011 W wave high to the Sept 2011 X wave low at intermediate degree. The lower limit at 1821 is the 1.27% 1821 extension of the larger intermediate move down from the Oct 2007 B wave high to the March 2009 low. The two extensions that make up the convergence zone are set up by the two Fibonacci retracements: the 78.6 retracement of the C swing down to the March 2009 low and the 38.2% retracement of the move up to the May 2011 high W at intermediate degree. Notice also the near equality of the intermediate Y vs. W along with the trend line overthrow of the upper double zigzag channel trend line. Additionally the Elliott Wave counts have completed fifth waves which complete primary degree B waves of the flat that started back at the March 2000 primary orthodox top. And if you measure the primary degree B wave of the flat you will find that it is just shy of the 138.2% extension of the it’s A leg move down to the Oct 2008 low. Equities are past due for a deep five wave intermediate C wave tumble down to at least the 621.30 which is the 138.2% of C vs. A wave flat. Prices could fall as deep as the 412 the 161.8% C vs. A wave extension.

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If markets break down from these levels, the financial catastrophe will be unprecedented. However, if stocks do make new highs, I don’t believe they will do so until at least the index pulls back to about the 1678, which is the area around the center trend line of the intermediate zigzag channel. If markets break above the strong Fibonacci convergence zone, the move could take the index as high as the 161.8% Fibonacci extension target at 2138. This extension would be of the Oct 2007 move down to the Feb 2009 666 low.

The count on the Dow Industrials is the alternate regular zigzag count which could also be applied to the S&P. Regardless of which count you prefer, the outcomes are the same. The Dow too has completed Elliott Wave targets at primary degree and is poised for a C wave crash to as low as 2871—the 261.8% C vs. A wave flat. Notice also the Fibonacci convergence zone between the 16284 and the 16761. Keep in mind that this is very stiff Fibonacci resistance at primary degree.

The US Dollar index bounced of the 79.69 which is the 70.7% retracement of the move up to the Nov 8th 81.46 high. The move up from the 79.69 so far is in three waves and I am looking for the Buck to trace out a wave four early this week. Five waves on the one hour seem complete for a wave three. The index closed on the high at 80.86 Friday and looks strong against all the currency for now excluding the Yen which completed its fifth wave at minor degree. Notice the 5 vs. 1 wave 100% equality at minor degree for a thrust out of a fourth wave triangle. This is always and ending move. Look for the Yen to move down the 100 in a hurry. The move could carry USD/JPY to the 86.98 the 61.8% in an intermediate wave two zigzag.

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The US Ten Year yield moved up to the 3.03 on Wednesday and closed at 2.99 on Friday a basis point above the Sept 5 third wave high. I would like to point out that the move up from the Oct 23 2.47 low is very choppy and corrective like. And most of the overlap is in the middle of the move. This swing could very well turn out to be a B wave of a flat. The index could turn down now or move up to the 3.17 138.2% extension of the zigzag move down from the Sept 5th top before moving down to the 2.37 in a C wave. Even if yields pass the 3.17, reducing the probability of the expanded flat scenario, then the next target would be 3.19 the fifth wave equality with wave one at minute degree which is not much further up. From there yields should retrace at least 50% of the move up from the all-time low—a usual retracement for a wave one. I am looking for the ten year to get up to between the 3.17 and 3.19 before a good size retracement.

It was surprising to see gold move up with the Buck this past week. Gold moved up in five waves on the hourlies to close near its high at 1236 Friday. The yellow metal could still move up for a deeper A wave before pulling back in a B wave. From there the metal should head on to the 1304 upper trend line of the 1 /3, 2 /4 channel to complete a zigzag fourth wave at minuette degree. Silver is also in what appears to be a wave four flat that is heading up now in a C wave to about the 20.95 which is a strong double converging upper channel trend line resistance. From these trend lines, both metals should head down to complete fifth waves of larger degree third waves. Sentiment is way down on the metals, which means that they are due for a bear market rally. But before so, both should move down in a couple of more swings. Look to sell them at trend line resistance.

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It looks like the last of the asset classes is turning. Keep in mind that Housing, the CRB, Gold, Oil have all topped. All that is left are equities. 2014 will be a sellers’ market. You wouldn’t know it by reading the news. That is what makes it so compelling. Everywhere you look, the optimism for the so called recovery is at an extreme. The Fed hasn’t even pulled back on QE yet, and the markets are celebrating. So much so that they fail to realize that the stock market is a bubble and that all this unprecedented money printing has done nothing to keep interest rates down. If the US economy were better, then why does it need 0 interest rates? The Fed knows that the US economy cannot handle higher interest rates. Let’s not forget what happened to Detroit. It is not just the banks and now leveraged up companies that are interest rate sensitive, but also National, State and local governments. If interest rates keep moving up, the Fed will call off the taper and probably double down. But I don’t think it will work.

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