I hope everyone had a great Xmas and finished 2013 in style. It was a year that rewarded equity bulls and the Yen carry trade. What will 2014 hold? We live in a world of escalating debt where central bankers fight the inevitable by printing money to maintain artificially low interest rates. From a bigger picture perspective, equity markets appear to be completing multi-year rallies, the USD/JPY and Nikkei 225 are in the 9th inning of a two year impulsive rally, US bond yields have rallied in 5 waves from historic lows and the Euro may have completed an 18 month corrective advance. The various chart structures indicate an imminent change in trend. I expect 2014 to be a year of trend reversals and increased volatility.
For those interested, I have published a new tab on this site called “Trading Plan” which outlines my trading process and tools used.
Equity markets are set up for intermediate term reversals. Bullishness, margin lending and complacency is at all time highs along with equity market prices. However, the structure of the advance warns of a terminating trend. My preferred count is that the rally from the 2009 lows is a (B) wave, supported by Fed money printing and financial engineering (share buybacks), in an environment of weak final demand and deteriorating balance sheets. I expect this entire 5 year rally to be retraced. That is my base case. I have not been fighting the tape. The market will tell us when the rally is over. In the meantime, I continue to trade on a short term basis both long and short. The Weekly DJIA chart below clearly illustrates my preferred wave count as I expect a revisit of the 2009 lows. I will not let conviction override price but instead, I will pick my spots and trade accordingly.
The weekly SPX chart below highlights my preferred and alternate counts from a bigger picture perspective. What is clear at the moment is that we are completing a 5 wave structure of lesser degree for wave (v). A near term count suggests we need one more push to new highs above 1850 to complete the preferred count, probably early this week. At that point, I will be looking for an initial impulsive decline to signal a near term change in trend and retracement towards the 1700 area. The green (immediately bearish) count is invalidated on trade above 1905. Alternatively, the black and red counts suggest we continue to unwind a series of 4th and 5th waves to new highs above 1900. Either way, it appears that equities are nearing an intermediate term correction so longs beware.
The near term SPX price action counts best as a 4th wave barrier triangle with immediate new highs to come to complete wave v of (5) with a price target of 1855/65. Trade below 1823 would suggest the near term high is in place (red (5)) and the larger decline has begun.
The near term DJIA chart would also look more complete with a new 5th wave high and associated momentum divergence.
The Nasdaq Composite and Nasdaq 100 continue their parabolic rise but as illustrated by the daily QQQ chart, price is forming a wedge with deteriorating momentum on each subsequent rally. Once again, while a push to marginal new highs is expected, this should provide an excellent shorting opportunity.
The BKX is in an extended 5th wave nearing measured targets in the 71.50/72.50 area. As my tell for this market I have been patiently awaiting completion of this rally to confirm an overall market change in trend. Subject to marginal new highs, the structure of this rally is nearing completion, which coincides with other counts presented here today warning of a near term market reversal.
The DJT has already pushed to new highs and is now testing the upper trend channel and measured targets in a 5th wave advance. Once again, I am alert to a reversal of trend at these new highs.
The Nikkei 225 rally counts as complete with a 5 wave thrust from a 4th wave barrier triangle terminating above the prior wave (3) highs. Wave (v) of (5) also reached its measured objective of equality with wave (i) as shown below. Ideally we get one more push higher for wave c of (ii) terminating BELOW the prior swing high of 16340. The red alternate count reflects an immediate nested 3rd wave decline from here.
The consistent equity market theme here is that we are in the final stages of this advance and a reversal down appears imminent.
To the FX markets and the Euro has reversed lower in 5 waves from key trendline resistance on the weekly charts. The rally from the 1.20 lows in July 2012 is corrective. I have two primary counts here, both of which are bearish near term. Either the Euro just completed wave b of a double zigzag with wave c targeting 110 OR wave D (red count) for a symmetrical triangle targeting 1.22 to the downside. Either way, I am bearish the Euro here against the 1.3893 December highs.
The EUR/USD near term count shows a 5 wave impulsive decline into last week’s lows following completion of a 5 wave advance of larger degree. I will be looking to go short a 3 wave counter-trend rally terminating in the 1.3720/1.3800 area against the prior swing highs.
In an ideal world, I would like to see one more marginal new high in the USD/JPY to coincide with new ATH’s in the equity markets but it is NOT required. Being long this pair here is akin to picking up pennies in front of a bulldozer. With the 105 upside measured target met for a 5th wave thrust from a triangle, the risk is clearly to the downside for a decline back towards 94 and likely much lower. One thing we know about thrusts from triangles is that they are quickly retraced so longs beware. I am expecting a multi month decline in this pair.
Finally, US bond yields appear to have completed a 5 wave advance from all time lows indicating a change of trend at larger degree. Yields should be expected to decline near term against the herd’s expectations. I think the long bond / short equities trade here makes the most sense providing the greatest risk / reward opportunity. While another marginal new high in yields is possible in the near term, being short bonds here is risky.
In conclusion, I believe all markets are at significant turning points for the start of 2014. The Yen carry trades and equity markets are in 5th and final waves but we as yet have NOT seen trend reversals. Price will always override conviction. The key near term opportunities I see are short USD/JPY, short EUR/USD, short equities and long bonds. This is how I intend to get positioned this week depending on price confirmation.
Good luck to all throughout 2014 and thanks for your support 🙂