NEWS ALERT |
IDENTIFYING THE ‘INFLATION-POP’ PEAK?By Peter Goodburn – Elliott Wave Analyst – WaveTrack International - copyright 2012 © It was almost eighteen months ago that the term ‘inflation-pop’ was introduced to describe how the price of various commodities would perform in the aftermath of governments and central banks’ response to the financial sell-off in 2007-08 by lowering interest rates and introducing quantitative easing. Copper has and probably always will be a good barometer to test the economic winds and so we have used this as a proxy - but this alone cannot reveal the direction and amplitude of the prevailing trend. Subsequent to the findings in our original copper report, gold became the subject of interest as it rides together within the inflation theme with the big question as to whether it could rise exponentially in this money-printing period of our history and, as some predict, accelerate to US$5,000.00 an ounce or more? Crude oil is also positively correlated to these two commodities and an integral element to the economy and so what can we expect there? And so, one-and-a-half years on, have prices followed the path originally described and what measures can we use in identifying the peak of this ‘Inflation-Pop’. As before, our guide in answering these questions is a methodology of pattern repetition discovered by R.N.Elliott over 75 years ago and named after him as the Elliott Wave Principle (EWP). It is a renowned ‘deterministic’ model that retains inherent price-predictive qualities. The EWP is a construct of repeating patterns recurring throughout historical price-data but in a seamless and ordered, non-random sequence that is also hierarchical in nature. It is a very powerful analytical tool that can be applied to a wide variety of asset classes in finance and other fields of study. Combined with the use of the Fibonacci Ratio Series (FRS), what seems to be an uncertain world of limitless, clouded possibilities suddenly evaporates away to reveal that sought after glimpse of sunshine and clarity. The peak of the ‘Inflation-Pop’ is the second sequence of a much larger, longer-term scenario that in totality represents a multi-decennial economic contraction period translated as a bear market for stock markets, commodities and asset classes of the like. The basic model can be depicted diagrammatically in EWP terms as a specific pattern of price development know as an ‘expanding flat’ – see fig #1. It is composed of three main price-swings and annotated A-B-C. The first is a decline that seemingly comes out of nowhere and is the financial ‘shock’ phase. It is much larger than anything seen in previous decades. The second is an advance that carries prices above the preceding high and is the inflation ‘pop’ phase, the centrepiece of this report. And finally third, is a rapid price decline that lasts several years and is the culminating ‘drop’ phase that completes the bear market. The identification of the terminal high for various commodities into the peak of this inflation-pop is conducted by applying the two supportive methods of the EWP and the FRS. Specific guidelines exist for this price advance. The first guideline is that the upswing beginning from the Dec.’08/Jan.’09 lows (Copper and Crude Oil) must unfold into three smaller price-swings [up-down-up], known in EWP terms as a zig zag pattern. The second guideline is to apply two differing Fibonacci ratio measurements to this sequence combined with the one that preceded it to establish a price convergence within a specified tolerance. This tolerance is defined by a common limit associated specifically to the ‘B’ wave of the ‘expanding flat’ pattern of the ‘inflation-pop’ asset price advance. Historical back-testing reveals that 80-85% complete at a percentage price band of between 9.01% to 38.2% above the preceding sequence, or the ‘A’ wave of the pattern. The high of this ‘A’ wave is the ‘orthodox’ highs recorded for copper in 2006 and crude oil in 2008. CopperFor copper, the first price-swing is the initial advance from the 2815 low of Dec.’08 that completed into the Feb.’11 high at 10190 as the original projection cited eighteen months ago. It was then forecast to then stage a counter-trend decline as the second price-swing before the third and final attempt to new record highs. At this precise time, it appears the decline remains in progress and expected to test lower levels in 2012 before turning higher. The overall model of three price-swings however, remains consistent for the forecast into the inflation-pop peak scheduled sometime into 2013, perhaps late in that year as cycles stretch to accommodate – see fig #2. Price levels to finalise the peak can also be measured using the Fibonacci Ratio Series. The three price-swing zig zag model requires specific measurements and the most common ratio that offers convergence is 38.2%. Extending the preceding decline that unfolded during the financial crisis of 2008 by this ratio projects to 13920+/-. When pattern and price-ratios combine in this way, it creates a strong ‘imaginary’ overhead resistance that commonly identifies the termination of the trend. Crude OilCrude oil is also unfolding into an identical model to copper. The ‘shock’ phase began from the (current) historical high of 147.27 in July ’08 ending at 33.20 in Jan.’09. The ‘inflation-pop’ sequence is the following advance that as yet, remains incomplete – see fig #3. It must also unfold into three smaller price-swings [up-down-up] – the first completed in May ’11 at 114.83 and although a subsequent secondary phase unfolded afterwards reaching to 74.95, it is considered incomplete requiring an attempt to 63.68 later in 2012. Once satisfactorily completed, the third sequence can begin a final advance into record highs. In crude oil’s specific case, extending the ‘shock’ phase decline in wave ‘A’ (147.27-33.20) by a Fibonacci 14.58% ratio projects an ultimate peak for the inflation ‘pop’ phase as wave ‘B’ to 183.00. Extending the initial upswing of wave ‘B’ (33.20-114.83) by a Fibonacci 38.2% ratio projects the next to 184.47 that forms a stringent price convergence in highlighting the most likely point of the inflation peak. Gold – XAUGold has remained central to the ‘super-inflationist’ thinking – it is difficult to remain an adherent when adopting a more pragmatic approach applying the EWP combined with FRS to show the way forward. That said, although demonstrating the spot bullion’s peak into an ultimate high towards US$ 2472.00+/- sometime during the next few years using these methodologies, the Elliott Wave pattern structure is not as stringent as the ‘expanding flat’ of Copper and Crude Oil. There is however, a comparison to spot gold bullion prices that does offer a unique insight in identifying the ‘inflation-pop’ peak - with its cousin, the Philadelphia XAU Gold/Silver index. It is an index composed of sixteen precious metal mining companies and is one of two most-watched in the marketplace. When spot gold bullion prices were trading at their lows of 251.70 in August 1999, the XAU index was approaching its own low of 41.61. The bull market upswing that followed is unfolding slightly differently – spot bullion as a defined expanding-impulse pattern of five price-swings, whereas the XAU index as a diagonal-impulse. The diagonal-impulse pattern also contains five price-swings but it unfolds into a defined wedge-shaped structure of narrowing price development – see fig #4. It is this shape of pattern that offers a more stringent upside price limit into the inflation-pop peak. In maintaining its integrity, the final 5th wave peak must project only marginally above those of the first and third price-swing highs. The first wave high was 209.27 the third as yet incomplete. Extending the 1st wave high by a Fibonacci 23.6% ratio offers a clearly defined limit to 306.38. The timing of this peak may stretch out beyond our idealised cycle period of late 2013, early 2014 but pattern and price-ratio presides. Peter's article features as part of a wider discussion that is currently gaining momentum within the financial community. For more details of this article and other titles including ‘Copper Super-Cycle’ – ‘Why Markets May be Irrational but Predictable’ – The Gold Standard, ‘Gold as a Financial Anchor’, visit The Gail Fosler Group LLC website to the following links:
Sincerely, Peter Goodburn END | FIN | ENDE |
Recent News Alerts
|