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UPDATING THE 'INFLATION-POP' WITHIN THE 18YR CYCLEBy Peter Goodburn – Elliott Wave Analyst – WaveTrack International - copyright 2013 © April 28th 2013 This paper updates the progress of the ‘Inflation-pop’ scenario first introduced two-and-a-half years ago. It specifically relates to the price development and trends of global stock markets and commodities following a period of increasing volatility that began in the year 2000. Much has been written about the dislocation between different asset classes during the first several years into 2003, with stock markets initially suffering across-the-board percentage declines of minus -50% per cent (benchmark S&P 500 – March 2000-Oct.’02) whilst during the same period, commodities like base and precious metals, held their levels and even increased. The most notable change occurred afterwards – the relationship began to merge and form a more consistent, positively correlated synchronicity. This began to take shape from about the March ’03 period. U.S. stock markets began to recovery from the bursting of the dot.com bubble whilst in Europe, stock index lows had just traded that were finally forming a base of support with the help of central banks that had aggressively lowered interest rates in the preceding years – this actually persisted into the summer of ’05 (June) even though treasury yields were rising more consistently. When stock markets began to establish upside momentum, commodities also began to accelerate higher too, notably copper, gold and crude oil. This positive-correlation relationship has remained constant ever since and we believe it will continue into the closing stages of the current decade. That stock market/commodity recovery extended into the peaks of Oct.’07-July ’08 but then came along the sub-prime fiasco triggered by loosening credit. The following 12-17 month period saw the S&P 500 collapse by minus -57% per cent, copper by -68% per cent, gold by -34% per cent and crude oil by -77% per cent. This was a second significant decline of the same decade – volatility was off the scale. What was going on - could any of this be predicted? Actually, yes. In replying to the affirmative, one invariably leaves behind any notion that markets are random in their price development – quite the contrary, it becomes a prerequisite to adopt a deterministic approach that instils a belief that markets are unfolding according to some invisible, guiding force. This can be demonstrated very simply, in the following price chart that was published in January 2004 – see fig #1. This is the price forecast of the Dow Jones Industrial Average (DJIA) as updated in Jan.’04. It depicts the DJIA unfolding into three main price-swings that began from the Jan.’00 highs of 11750.30. The first ended into the Oct.’02 low at 7197.50 but the successive second and third sequences are yet to unfold and forms this forecast several years ahead. The second is an upside projection measured to record highs, at 14169.80 and then the third, staging a collapse to a final low at 6411.30 – time-cycles for ending this pattern are approximated – see left inset chart. The actual price development, how prices unfolded amidst all the economic and fiscal changes that occurred in the following years follows the exact sequence as shown in the track-record chart – see right, inset fig #1a. This shows the second sequence continuing higher with an absolute peak recorded at 14198.10 (28.30 points deviation) and the third forming a low at 6470.00 (58.30 points deviation). From a mathematical standpoint, a forecast that predicts such activity both in pattern form and price amplitude several years hence that unfolds almost exactly as outlined is assigned a several thousand-to-one chance of realisation - and yet this occurred. The only logical conclusion is that there is an underlying law governing price development, and this can be used to create guidance for future price movement. The methodology used to predict price activity is known as the Wave Principle (EWP). This is a detailed formulae based on pattern-repetition discovered by R.N.Elliott over 75 years ago. 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, price potentialities suddenly becomes a concise route-map of future price development. In Perspective - The 18yr Economic/Stock Market CycleThe EWP is applied with cycle analysis to assist in ‘timing’ the ongoing rhythms and price fluctuations. Our analysis shows a repeating 18yr cycle in economic/stock market activity along with a longer-term 42-44 year cycle. The 18yr cycle is in fact the mid-point of the greater 36yr cycle that measures trough-to-trough, with the mid-point every 18 years. The last peak was in the year 2000 and this coincided with the ‘orthodox’ Elliott Wave top of the long-term uptrend of the S&P 500 and DJIA that began its expansion ‘bull-market’ phase from the Great Depression lows of 1932. This advance must now be ‘balanced’ by a proportional price decline that is expected to last 18yrs basis the cycle, eventually forming a low into the year 2018+/-. From an Elliott Wave perspective, this 18yr cycle is composed of three main price-swings and assigned letters in the normal construct of pattern identification, A-B-C. The hierarchic system also assigns these letters as movements in super-cycle degree although for this paper, this is only relevant to identify these to chart illustrations. Super cycle wave A completed the first price-swing at the price lows recorded in March ’09 for the S&P and DJIA – see fig #2. Super-cycle wave B is currently in progress, as yet incomplete and destined for record highs prior to completion. Shorter-term cycle studies suggest this will complete into Q1-Q2 2014. The following decline is represented as super-cycle wave C and this is expected to be the most devastating decline since the 1929-32 period of economic history with up-coming lows completing into the 18yr cycle period of 2018. We name these three price-swings as the ‘Shock-Pop-Drop’ scenario and in Elliott Wave terminology, depicts an expanding flat pattern. The Inflation-Pop – CommoditiesThe second sequence of the ‘Shock-Pop-Drop’ scenario is the ‘Pop’ or ‘Inflation-Pop’ sequence that is identified as super-cycle wave B. It began its advance from the March ’09 lows (S&P 500) but a little earlier for some commodities, in Dec.’08, Jan.’09. The positive correlation between the S&P 500 and commodities has cemented since central banks have continued their quantitative easing programmes. The EWP shows pattern commonalities for stock indices and commodities in the recovery advances from these lows. We can, with confidence project/forecast a continuing price advance into record highs with culmination into Q1/Q2 2014. One of our benchmark studies is of the CRB-Cash index (Commodities Research Bureau) – see fig #3. This index declined rapidly during the financial sell-off of 2008-09 shedding -47% per cent of its value in just six months. Despite this phenomenal decline, it has since recovered and traded into another new record high. This index is a basket of different commodities with its components more heavily weighted to the metals, base and precious with less from energy, crude oil etc. The recovery has unfolded into a three price-swing event, completing at 691.09 in April ’11, but the following decline into the June ’12 low at 502.28 has been identified as a counter-trend sequence that translates into more upside into the future. It means the entire recovery from the Dec.’08 lows remains incomplete. Another advance that replicates the form of the preceding one (322.53-691.09) must now unfold during the next 12-18 month period. When FRSeries (or Fib-Price-Ratios) are applied, we can determine upside price targets towards 915.38-924.62. The ‘inflation-pop’ is alive and well. The development of Copper prices as traded on the London Metal Exchange (LME) provides an excellent barometer of the fluctuating rhythms of economic expansion and contraction – see fig #4. In our last update over 12 months ago, prices were expected to decline back inside the trading-range of the preceding upswing from its Dec.’08-Feb.’11 advance (2815-10190) and this is exactly how prices have developed with a recent re-test of the Oct.’11 lows of 6635. Prices are now approaching some important downside support towards 6215-6032 during the next couple of months – once tested, Copper is expected to begin the next and final stage of the advance already in progress from the lows of Dec.’08 with a surge into new record highs, targeting price levels towards 13920. Crude Oil shares the same pattern configurations as the CRB-Cash index and Copper – see fig #5. It sustained a sharp decline from its ‘orthodox’ record high of 147.27 into the Jan.’09 low of 33.20 but has since recovered to the May ’11 high of 114.83. This advance has unfolded into an Elliott Wave five wave sequence that translates into more upside continuity in the future. The balancing corrective decline of this advance has already completed, a little higher than last year’s projection, at the June ’12 low of 77.28. The subsequent upswing to date are the beginning sequences of the next advance that replicates the first (33.20-114.83) with ultimate upside targets during the next 12-18 month period towards 183.00+/-. This is represented as the final sequence of the ‘inflation-pop’ scenario. The upward acceleration is not expected to begin for another couple of months, but when it does, all asset classes are expected to join in. Gold prices have been under scrutiny recently, especially since its dramatic sell-off during early April ’13 has resulted in major ETF (Exchange Traded Fund) liquidation. Although investment banks have led the analysts’ consensus in announcing the end of the longer-term uptrend, the EWP depicts the recent decline as simply another counter-trend correction within the progressive uptrend – see fig #6. The low at 1321.50 has stopped the selling at exactly the levels forecast before the event occurred. The 1321.50 area is a product of two Fib-Price-Ratios forming a convergence, where the initial decline from the all-time-high of 1912.70 to the initial low traded in Dec.’11 (1522.48) is extended by the ‘golden-ratio’ of 61.8% and also where a fib. 61.8% retracement measurement is made of the preceding upward sequence between 1043.80 (Feb.’10 low) to the high of 1912.70. When prices find support at such convergences and then respond in the opposite direction of travel, then this increases the probability of directional change - in this specific case, to the upside. Gold has since recovered by over US$164.00 dollars an ounce and is now in a similar position as that of the initial recovery phases following the low of US$680.75 traded in Oct.’08. This increases the probability that gold will continue higher during the next 12-18 month period and participate in the ‘inflation-pop’ along with other commodities and ultimately extend into new record highs to complete its long-term uptrend. END | FIN | ENDE |
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