Summary
Stock Indices Next week’s central banks’ meetings will be crucial in determining whether a Santa Claus rally will unfold or if his reindeers will crash below nearby stock market support levels. Most of September/October’s counter-trend rallies are done although those nearby support levels may yet provide the springboard for one final lift higher of around +7% per cent if they’re protected. The critical level of support for the S&P 500 (futures) is 3867.00 and Nasdaq 100 at 11231.25. Holding above would heighten the probability of one final push higher – but any downside penetration would sound the alarm bells, otherwise confirming existing highs traded the previous Friday have already ended September/October’s rallies. Market sentiment has turned neutral since prices have run higher from those lows of the last couple of months which allows for the next impact of declines into next year. The larger picture remains steadfastly bearish – double zig zag declines that began from the Nov.’21/Jan.’22 highs are set to resume lower with a sustained secondary zig zag decline beginning from around current levels and lasting through to end-Q1 ’23. We’re expecting most major indices to decline around -30% per cent in 2023, a similar percentage decline as this year from peak to September/October trough. The only difference is that this year, analysts didn’t expect these big declines, but it seems there’s a consensus expectation for a global recession next year.
Currencies (FX) The US$ dollar index is attempting to complete a five wave impulse decline from September’s high of 114.78 towards targets of 102.82+/- but it’s not quite there yet. Last week’s low at 104.12 is heading in the right direction but last Monday’s rally has begun a short-term corrective upswing that is expected to continue higher this coming week. Somewhat limited, this rally fades following Wednesday’s Federal Reserve meeting with the dollar then expected lower, in testing that final decline towards 102.82+/-. Similar inverse movements are expected in the various G10 currency pairs. Once the dollar has ended its five wave impulse downtrend at 102.82+/-, a sizable counter-trend rally begins a period of dollar strength, pulling dollar-sensitive precious metals lower too. The probability of the dollar resuming its uptrend and breaking above September’s high of 114.78 has diminished considerably because the current five wave impulse decline is too big to be the ending sequence of an expanding flat correction within a continued uptrend. Besides, may other G10 currency pairs reached extremes when the dollar hit tops in September – just look at the NZD/US$ pair which completed a corrective downswing from its Feb.’21 high of 0.7465 into the mid-October low of 0.5512 but holding above the pandemic low of 0.5469 and is now trending higher to 0.6444 – that’s giving a clear signal that the US$ dollar has topped out and has begun a new multi-year downtrend against its G10 counterparts.
<b> Bonds (Interest Rates) </b> Generic long-dated government bond yields have been declining from October’s highs but found support into Thursday’s lows and are now expected higher into year-end. This comes ahead of next week’s central bank meetings – first up is the Federal Reserve in their interest rate setting meeting on Wednesday. They’re widely expected to soften the pace of rate hikes, coming through with a 50bps basis point increase this time around – nothing to exciting about that especially since Jerome Powell has already provided hints to that effect last week. But this week’s strong labour figures and today’s strong producer prices may give reason for the Fed to accompany rate hikes with more hawkish comments which would certainly support what we’re expecting as a short-term lift higher in US10yr yields within the broader decline of primary wave 4. Next week’s European Central Bank meeting on Thursday is expected to decide on a 50bps basis point hike although accompanying statements being more dovish than their Fed counterparts. But if US10yr treasury yields are already heading higher, so DE10yr bund yields will follow – we’re expecting a 50bps rally to the upside before yields resume lower again by early-January.
<b> Commodities </b> The main drivers for precious metals are the US$ dollar, inflationary pressures and central bank interest rate trends. The US$ dollar’s decline from September’s high has coincided with signs of peak inflation and long-dated yields falling from this year’s highs, all bullish for gold and silver. And yes, precious metals have responded accordingly, with strong gains from their inverse September lows. So far though, gold and silver have only managed three wave sequences within these advances and moreover, they adhere to counter-trend fib-price-ratio measurements. That’s dangerous because the dollar’s decline is approaching the completion of a five wave impulse pattern and once confirmed, will then flip higher to begin a multi-month counter-trend rally. That will inevitably pull gold and silver lower but from what level? Should that begin from current price levels, it will confirm September’s rallies are counter-trend sequences with modest lower-lows into early next year. But persistent advances above current levels would turn those three wave patterns into five wave impulses, confirming existing lows began new medium-term uptrends. Today’s analysis of Crude oil has relabelled the rally from September’s low of 76.25 as ending a counter-trend for primary wave X into November’s high of 93.74. It’s a strange rally because of its internal subdivision structure but it would explain why the next decline into today’s low of 70.08 has unfolded into a completed five wave impulse, because this low ends primary wave A within a secondary A-B-C zig zag decline of cycle wave B’s triple pattern that began from March’s high of 130.50. Shorter-term, this translates into a corrective rally beginning now towards 81.05+/- but bearish again afterwards, in keeping with bearish stock market calls for next year.
