Financial Reprieve and Update of the TSX, IEV and TNX

When volatility spikes the economy in certain ways, it can cause some leveraged positions to implode which can, through paper markets collapse the price of a given commodity etc. Some event is looming that will serve as a trigger for the next down leg in the broad stock market indices...the rising US Dollar Index is serving that at present and as mentioned earlier this week, there are thousands of potential dominoes out there waiting to be knocked over to start the cascade...just which one and when this occurs is an unknown. And with volatility comes government to try and maintain stability through financial respite. There are many definitions of respite in the dictionary, but the short and sweet version is “To delay the carrying out of (punishment)...or to relieve temporarily, especially of anything distressing or trying”.

Central banks around the globe through money printing and low interest rates are attempting to keep the system from imploding, which is by human nature, a survival mechanism. All of the collective behaviour patterns from the populous are wound into the Contracting Fibonacci Spiral and what happens at each time post is a reflection of this (for new subscribers that are unfamiliar with this idea, simply use the Archives button on the site and scroll back to July 2011 or more conveniently, Google Contracting Fibonacci Cycle and a ton of articles that I posted on the web will appear). I mentioned this two years ago when I first introduced this theory, that as we approach each time post, they become shorter in duration and the volatility will only continue to increase until the cycle reaches its point of singularity (the end of its cycle).

With financial reprieve being the global theme at present, especially at this point in the Contracting Fibonacci Spiral the markets are trapped in, the bouts of deflation and inflation will only become worse and worse and occur at much more rapid time intervals. I have approached a few mathematicians and computer programmers to try and take the idea of the CFS further and develop simulation models for trying to predict turning points with a greater level of certainty and “if” corrections can be determined.

The importance of where we are in this cycle is really critical, because I believe that computer simulations could provide the best solutions for Central Planners to cushion the blow of 2020 when the Contracting Fibonacci Spiral cycle reaches its point of singularity.

The financial reprieve occurring at present is a “fight or flight” mechanism for survival, so what is occurring at present must have some predictability of appropriate historical data is added to analyze the past for what happened and model what could have happened inf things occurred differently. With the financial reprieve, “bail-in's” appears to be the nouveau term for direct taxation of anyone with money over $100,000 at present. With bail-in's computers can leave a messy trail and leave those with drained bank accounts left holding the bag, while bankers go...oops, sorry, we have no money and we can not help you. What has happened in Argentina and other countries could happen in Canada and the US in the not too distant future also....hijacking pension funds, IRA's, RRSP's, direct contribution pension funds etc. etc. and giving everyone a ticket for a new “Universal Pension Plan”. When the poor are the majority and anyone left standing has a fund, the fundamentals of democracy rules can be somewhat unpleasant. The funny thing is with bail-in's or removal of money from pension funds etc. never results in removal of accumulated debt that one has on a mortgage, credit cards etc.

So, with financial respite occurring at the moment, the above paragraph describes a devlish version of Robin Hood, except this dark figure steals from the Middle Class and gives to the entire system, while the rich somehow walk away relatively unscathed. So if the entire system appears rigged at the moment, how can people protect themselves and as Jim Sinclair states “Remove themselves from the system?”. The answer is gold and silver bullion.

One thing with gold is that people are buying en masse at present with prices below $1300/ounce. What would happen if the price were to drop to below $1000/ounce? Chances are many would sell because that would in the eyes of many be the end of that bull market. At some point, likely 2020 is when the price of bullion reaches the crest of its price but until then, prices are likely to remain range bound for the next 2-3 years. What I am suggesting is that people continue to accumulate bullion on a gradual basis, such that there is a dollar cost averaging over the next 2-3 years. Then, when bullion becomes nearly impossible to obtain after 2018-2020, those owning it can quietly sell it for a huge profit...at least that is the game plan.

The above paragraph is the only way to really get one's money out of the system. Gold and silver stocks will have their day in the sun in the coming years, but when bullion prices head higher, the problems being witnessed with Native or Village land claims, hands of municipal, provincial/state and country level governments with their hands out for skimming profits will only grow. I think nationalization of gold and silver mines will be the eventual outcome for most South American nations, except for Brazil at the moment. Owning the precious metals in hand is going to be the best way to preserve wealth and ride out any potential waves of inflation beyond 2020. The CFS is calling for shorter time frames for each subsequent time post between now and 2020, so bouts of inflation and deflation as mentioned earlier will become more intense with increasing volatility.

It is time for everyone to employ individual financial responsibility for their future destiny and protect themselves. When the end of 2015-2016 hits, this is when currencies will start to collapse and send precious metals higher. Having money hitched to gold and silver bullion now will allow for debt repayment in full and then some once a top in the precious metals happens.

Analysis today is focused on the Toronto Stock Exchange (TSX), Euro 350 iShares (IEV) and the 10Year US Treasury Index (TNX). Nothing ever goes to forecast and no one is ever right 100% of the time, but there can be patches where things fall somewhat into place with some minor delays or quicker than expected. The US Dollar fits into this camp by forming a very complex wave structure that finally is about to break higher.

The broad stock market indices are rallying at present, but as noted earlier, have tops due within 2-3 weeks from now. The inherent weakness in the stock market is being felt in other currencies, like the Canadian Dollar. The Loonie is down nearly 8% over the past 10 months and that will have a slowing impact on the number of Canadians hitting the border towns for deals. The huge amount of derivatives and large amounts of leverage on certain plays, such as gold or on currencies can increase loads by 20-40 fold, depending upon the amount of leverage being used....great if you make money, but bad if you lose money.

Toronto Stock Exchange

The daily chart of the TSE is shown below, with lower Bollinger bands beneath the current price, suggestive that a bottom was put in place. Full stochastics 1, 2 and 3are shown below in order of descent, with the %K above the %D in 1 and 2 and beneath the %D in 3. It is important to note that a lower low was put in place in late June, setting the stage for the rolling top developing over the course of the summer. Analysis of the S&P 500 Index suggests another 2-3 weeks of sideways to upward price action, so this momentum should be transferred to the TSX. Also, oil heading to $111/barrel will add further underlying strength, since the energy complex accounts for nearly 28% of the TSX weighting. Look for a lower high 2-3 weeks from now...some may consider lightening up positions at this point in time to see what happens in the fall. If things occur as the CFS has predicted in the past, the TSX could fall to 8500-9000. To play both sides of the trade, remaining 50% cash and 50% invested provides a good balance, as it straddles both sides of the trade.

Figure 1

The weekly chart of the TSX is shown below, with price excursions beyond the lower 21 and 34 MA Bollinger bands last week, suggestive that at least a short-term bottom was put in place. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K beneath the %D in all three instances. Stochastics on the weekly chart suggest at best, a short-term bounce, followed by a continuation of the downward trend. Based upon a 50% retracement of the current decline, the minimum upside 50% retracement expected is 12,300, with the potential for a move to 12,400...anything more would be gravy. The daily chart suggests strength for the next 2-3 weeks, so anyone wishing to balance risk should sell into strength. Those in energy stocks should wait until oil hits near $111/barrel to see if the upside momentum continues, or starts to wane. If the forecast holds true, the %K in stochastic 3 suggests a bottom could be some 6-8 months out. It is also important to note the potentially huge head and shoulders pattern that developed form 2010 until present. A move beneath 11,000 could trigger a measured move to around 8,000.

Figure 2

The monthly chart of the TSX is shown below, with lower 21 and 34 MA Bollinger bands in close proximity to the current price. The lower 55 MA Bollinger band has curled up, suggestive that a top was put in place. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K above the %D in 1 and 3 and beneath the %D in 2. The huge sideways consolidation of the TSX over the past 3.5 years has to be resolved one way or the other, and with a strong US Dollar, the trend is most likely to resolve to the downside. Only time will tell, but caution is warranted at this point in time.

Figure 3

Euro 350 iShares

The daily chart of the IEV is shown below, with the lower 21 MA Bollinger band beneath the 34 MA Bollinger band, suggestive that an oversold condition is developing. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K above the %D in 1 and beneath the %D in 2 and 3. With the %K in stochastic 1 rising above the %D and the oversold Bollinger band condition mentioned above, it appears that a bottom was put in place and a rally should occur along with the broad stock market indices of North America. Timing appears to suggest a top occurs in 3-4 weeks for the IEV, compared to the 2-3 week topping period of the S&P, so anyone playing the IEV might want to take this observation into consideration.

Figure 4

The weekly chart of the IEV is shown below, with the lower 55 MA Bollinger band curling up sharply the past few months, indicating that an important top was likely put in place on May 22^nd. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K beneath the %D in all three instances. As per the TSX, is appears the rally underway is a sucker's rally, to try and get more bulls to buy before a continuation of the down leg occurs. Given the height of the %K in stochastics 2 and 3, downward price action could persist for 6-8 months before a definitive bottom is put in place. There is no head and shoulders pattern present in the IEV as per the TSX, so is a major downturn were to occur, it appears the TSX would be hit harder.

Figure 5

The monthly chart of the IEV is shown below, with Bollinger bands not providing any indication of trend. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K above the %D in all three instances. Although the monthly chart is providing no indication of a top at present, the daily and weekly charts should be examined to see if the current move up extends beyond 3-4 weeks. The trending pattern of the %K in stochastics 2 and 3 appear rather weak, so chances are the double top at $42/unit holds. If the downward trend continues for 6-8 months until bottoming, the minimum price objective is $28/unit.

Figure 6

10 Year US Treasury Index

The daily chart of the TNX is shown below, with upper Bollinger bands moving well above the current value, suggestive that a top was put in place. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K beneath the %D in 1 and 2 and above the %D in 3. Positioning of the %K in all three stochastics are rather overextended after rising over 50% in less than 2 months, suggestive that a correction is looming.

Figure 7

The weekly chart of the TNX is shown below, with price excursions above all three upper Bollinger bands for 3 consecutive weeks, suggestive that an overbought situation is developing. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K above the %D in 1 and 2 and beneath the %D in 2. Lower 21 and 34 MA Bollinger bands have yet to curl up, strongly suggestive that a top has not been put in place and will not be put in place for at least another 2-3 months. An overbought condition is developing, but it appears likely that the TNX continues to trend sideways or higher for at least another 2-3 months. After this, expect a potential collapse back to the gap breakout that happened in late May/early June.

Figure 8

The monthly chart of the TNX is shown below, with a huge price excursion above the 21 MA Bollinger band for the second consecutive month, suggestive that an overbought situation is developing. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K above the %D in 1 and 2 and beneath the %D in 3. Extrapolation of the %K in stochastic 1 suggests that the 2-3 months of minimum expected upside could extend to an even later date...Rates are on the rise in the US at present, which is one of the underlying reasons providing strength to the US Dollar.

Figure 9

The long-term Elliott Wave count of the TNX Is shown below, with wave (D) thought to be forming at present. At a minimum, wave (D) is expected to last for 12-18 months...if the US Dollar has 2-2.5 years of upside, then the TNX could in theory rise for up to this amount of time.

Figure 10

That is all for today...back on Monday with an update of oil, natural gas and the AMEX Oil Index. To our neighbours to the south, we hope that your 4^th of July Holiday was a good one. Have a great weekend.

Analysis of the oil, natural gas, XOI, HUI, S&P 500, US Dollar (and 3 currencies), Gold (and 3 ratios) and on an alternating weekly basis TSX, IEV and TNX or various exchange traded funds along with commentary as per this update are  provided on a weekly basis to keep track of developing trends. Also the Captain posts once or twice per week with articles pertaining to the macro economy and and put-call ratio analysis

David Petch

July 5^th, 2013