Sunday, March 8, 2015

Elliott wave analysis of DJI - Has the long term picture changed?

DJI has the long term picture changed? 
For years I looked for wave D higher in the expanding triangle. I will admit, that I was looking for a wave D top ultimo 2013 near 16,450 (see my blog post from March 26 -2012 here). Well here we are at 17.857, with a peak at 18,288 more than a year after the expected top, so it would be obvious to ask, if the long term picture has changed?
I don't think that things has changed and I still expect the rally from the March 2009 low at 6,470 as being wave D of an expanded triangle. The rally from 2009 has been kept artificially alive by the Central Bank's pumping billions of USD into the market, but if we look at the RSI indicator, we can see that it has made no new high. Actually it has respected the down trend-line nicely, but it have not yet given a sell signal either.
For a sell signal to be triggered a break below support at 15,855 is needed. The crowed has once again become complacent as the VIX shows 

but do they have any reason to be complacent at this point in time? I would not be complacent at this point in time. I think, that at minimum a major correction is long overdue and if my expanded triangle count is correct, the decline will break below the March 2009 low too.
If we look at the margin debt, which has proved to be a very reliable long term indicator (the chart below is by courtesy from Doug Short). We can see that the margin debt peaked already in February 2014 and has since then moved sideways, but a break below the April/May 2014 lows will trigger a major sell signal as it did in December 2007 and as it did in September 2000, so there is all the reason in the world to pay close attention to this indicator.

Finally I think it's worth paying attention to the US 10Y yields as they have staged a huge rally the last couple of weeks (see the chart below). Will the funds move into the stock market? well it's possible, but I'm not convinced that this is the first place they will go. I think it's more likely that they will move to the currency market and push the USD even lower along side JPY. As the debt needs to be paid back the currency that normally is used for borrowing, will become much stronger as investors cover their debt. 

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