This is a follow-up to the March 10 wolfewave setup in the financials.  They are now at target levels after a remarkable week.  Technically, this is the first solid lift above the daily 20 exponential moving average.

US Dollar index update – the setup which was first flagged on March 3 as the dollar was retesting its 2008 spike highs has indeed produced a clean pullback.  It is now approaching target levels – and as expected, dollar-denominated equities / stocks / commodities have lifted nicely in response to movements in the foreign exchange markets.  With the Fed action expected today, I believe that the target levels will be met around 85-86.  In the larger context, this will be an inverse head & shoulders pattern in the making.  A day to book profits in short dollar positions (long EUR AUD) after the Fed announcement in any late surge.

7:00pm update – Wow.  The Fed announcement that they would be buying up to $300 billion in long-term goverment bonds sends the dolllar into a hard tail spin, ending much lower than the projected wolfewave target.  At this juncture, it has pulled back exactly 59% of the previous swing high on the daily chart.  Interestingly enough, this is the same percentage at which the swing low was recorded on the weekly chart in mid-December retracement.

A follow-up to the March 12 setup – markets have now retraced to the January spike lows around 800.  The Advanced GET software is suggesting that a 5-wave advance has completed on the hourly charts.

Rally, and Hoofy will finger the financials and say, “As go the piggies, so goes the poke.” Indeed, with the BKX holding 5% gains, the bull has a point.    – Todd Harrison, Minyanville

There’s also a wolfe running in the midst of this stampede. I included an Elliott wave count in parenthesis, so that you can understand how these patterns overlap into waves 4 and 5 – both setups are leading signals of a bounce sequence.

9:30 am – Markets open right at the wolfewave target measurement from yesterday’s setup.

12:20 update – Slow ooze lower into the lunch hour, a completed 5-wave down sequence at smallest time scale.  Watch for a counter-trend lift to complete during this temporary interlude.

1:20pm – As expected, an a-b-c retrace completes over lunch

3:05pm – Small overlapping structure suggests that there may a lift from these levels.  A place to flip long with a tight stop.

3:50pm – A quick lift, followed by a plunge to match Monday’s measurement.  Tuesday/Wednesday was a small interlude to form the bear flag.

Oddly enough, the hourly chart ends with a slight positive divergence (lower prices, higher momentum).  The last time this was seen on this time scale was at the previous Elliott wave 1 lows around January 21.  Is this perhaps a clue for Friday’s action?

1:00pm – A small measured move pullback meets target measurements following a lunch consolidation.  A bull flag setup for the afternoon session.

2:40pm update – bull flag targets = retest of previous spike highs.  This is the third push higher, so beware of higher prices / lower momentum divergence.

3:00pm – A full measured move target tag.

This lift in equities, as mentioned yesterday, is on the reversal stick of the US dollar – as the dollar falls, equities lift.

4:20pm – markets settle down with the news crossing the tape that mark-to-market accounting will be reconsidered.

The hard sell-off into the close and overlapping wave structure suggests a move to retest the 700 level.  A wolfewave pattern on the 5min chart.

I originally posted this wolfewave setup back on October 2008.  I became very alarmed at as the lease rate (forward hedging) picked up significantly and believed that prices would retest the $650 level.  Bad call on my behalf.  Instead, prices have continued to lift as markets exhibit sickness due to the financial crisis, and in spite of a rising dollar.  Today gold is testing the previous spike high around $1000.  Exactly at the pattern target measurement.

Normally, gold trades inverse to the dollar.  The more the dollar is subject to devaluation, the more precious gold becomes.  This relationship has held for many years, however in the last three month, we have witnessed a divergence in which gold AND the US dollar have risen together.  The only way to explain this phenomenon is that the dollar is now considered a ‘safe haven’ currency, and gold a hedge against the global bouts of competitive currency devaluation.  As zanussi commented in this blog a few days ago “Интересно, как мы будем жить, если доллар рухнет?” – “I wonder how we will live, if the dollar collapses?”

Where does gold go from here?  This chart was from 2002 as gold attempted to scale the $325 resistance level.  In many respects, this daily pattern looks eery similar to the current weekly price action.  There is also overlap which is visible on the daily gold chart much like back in 2002.  This is just a head’s up to keep a tight stop if there is no decisive breakout above $1000 on this attempt.

The gold lease rates have returned to more ‘normal’ levels following the Indian wedding season 5-fold spike in September – October.  Monitor this signal and be suspect of any sudden surge in the forward hedging activity.

11:15am – The first pattern that presents itself is a small momentum divergence, a measured move setup.

1:45pm update – A second measured move pattern completes, pocket trade to 10am spike lows

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2:15pm – wolfewave pattern presents itself on 5min chart, overlapping wave structure

3:00pm – wolfewave target tag

4:00pm – glide to a finish

10:00pm – possible Elliott wave 5 termination sequence on hourly ES futures charts

10:00am – wolfewave pattern setup into the close reaches target levels

11:45am – ES futures trade right thru the 845 pocket and gartley target mentioned last night.

2:00pm update – first signs of a divergence on intraday basis.  Start to look for wave overlap.

2:30pm – OT flip

3:00pm – first overlap series and wedge / wolfewave possibilities showing.

3:22pm – ww setup

10:35am – market immediately opens with a third push lower – wolfewave pattern.

11:30am update – pattern targets are met.  Note the lack of overnight globex futures quotes, therefore inflection points 3-4 are invisible in this chart.

2:30pm update – ES has a second lift and consolidation sequence.

5:30pm recap

The Japanese yen has shown a lot of strength, however, at this juncture a ‘pocket trade’ is asserting itself.  At a smaller scale, a head & shoulders pattern is also visible, which should take it back to a retest of the 1.06 level.  This is a short candidate in any cross trade for the next week or so.

I also realized that the currencies futures are better served by using the continuous contract symbols, since they will illustrate overnight and intraday prices ranges more clearly.  Below is an example of the yen continuous contract (J6H9 compared to above JYH9) and the improved detail.

GDP numbers are released and markets immediately goes into reactionary mode. At 2:30 pm a wolfewave pattern sets up on the 5- and 15-minute time frames. It also represents a measured move target level following a noon swing high.  Thanks to Huddy in b-line channel for the chart.

Caution Ahead

The VIX, or volatility index has produced a falling wedge pattern on the daily charts and on Wednesday tagged the 78.6% retracement level.  It also produced a solid bounce off the 200 day moving average around 36.5 and 2007 spike highs of 37.5 (past resistance becomes future support) as well as a pixel-perfect trend line test combined with a positive divergence (lower prices, higher momentum).  This indicator moves inverse to the stock market, and therefore is giving a bearish signal for equities.