Wednesday 7 October 2009

Reaching for the sky

BOTTOM LINE: Stocks are in the process of building fifth waves higher. As things stand now, it looks like those waves might fail at the previous highs or make marginal new highs. Internal structures of some European indices appear to have traced out impulses from recent lows, which might be whole fifth waves. They could also be first of three impulses that higher that would make the final fifth wave.

Below is a daily chart of the DAX. Neither the count nor the projection has been updated since Wednesday last week. Upside targets and possible topping zone remains at 5800.

The Dow Transports bounced as expected, and are now tracing out a corrective wave higher. I do not expect new highs here.

This is an hourly chart of the Emerging Markets ETF (EEM). So far, it counts perfectly as an ABC correction. Upside is severely limited. Penetration of 2 October lows would mark the top.

Contrary to popular belief, lower yields have not been "good" for stocks for the past 11 years. Notably, 2 year note yields have led the market since the last bear market began. Either this relationship is broken and we are in the "new paradigm" of low inflation forever which brings higher valuations forever, and this is what the divergence between yields and assets tells us, or we are on the verge of a significant decline in assets or rally in yields. For a number of reasons, I expect it to be the decline in assets.

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