Catching the Wave: When the Bough Breaks

Over and over, Elliott Wave Theory (EWT) continues to prove its value for those open-minded enough to embrace it. I've personally tried using it across stock indices, individual stocks, ETFs, metals, grains, interest rates and currency futures to demonstrate its unique ability to use the herd mentality, rather than be subject to it. In my comment on the Swiss franc last month, EWT allowed the warning near top tick, around $1.40, that late-trend buyers were going to become very unhappy. About a week later the pattern had developed further, allowing me to illustrate the coming movement on a chart and offering $1.25 +/-0.02 as our initial target zone, with $1.17 as our larger forecast. It now appears that the zone near $1.1450 +/0.015 will finish a five-wave decline from the $1.30 swing high last week, and form several symmetry measurements that can support a bounce of several weeks, perhaps toward $1.25 +/-0.02 again. Swiss Franc -- Daily Source: eSignal View Chart » Another sector to which EWT alerted Real Money readers was the financial sector, through Financial Select Sector SPDR (XLF). Late last month I showed a longer-term chart of this group, saying, XLF is clearly warning of a deeply painful economy in the coming months. Any bounce toward $13.50 +/- .50 should be used to exit losing long positions, as well as be used as a sign of things to come for the members of this particular sector. From the close near $12.35 on that day, XLF pushed higher for a couple of days, topping around $13.50 on Aug. 30. The 10% slide from that price level into this one informs wave surfers that the financials are breaking down again. The gaps left on the this daily bar chart are leaving an island gap, in which last week's buyers are no longer attached to current reality. With the stochastics in sell mode, and free fall formation, $11.25 +/-0.50 is likely only short-term support. Eventually the 2009 low near $6 should be broken, probably in the second or third quarter of 2012. Financial Select Sector SPDR (XLF) -- Daily Source: eSignal View Chart » Yesterday, Fed chief Ben Bernanke was quoted saying U.S. banks' exposure to Europe is manageable. So this time, following the story about Lehman Brothers having been contained, we are supposed to trust that we are being told the whole truth? Clearly the market doesn't believe a word of it, as it has hammered banks and risk exposure since February. Let's briefly turn to another manic market: gold. The metal's Daily Sentiment Index (DSI) survey from Friday, courtesy of trade-futures.com, showed traders back to 98% bullish, matching the peak seen at the Aug. 22 probe above $1,900 per ounce. This week's marginal new intraday high again failed, soaking up a whole lot of buying power. Although we cannot rule out a campaign on the magical $2,000 level, the air is so thin at the 98% bullish altitude that another purge toward at least $1,650 +/-$50 appears imminent. The next EWT/Fibonacci target zone is $1,300 +/-$100, and $900 +/-$100 continues to be the mortgage the house and back up the truck buy-of-a-lifetime zone. Gold -- Daily Source: eSignal View Chart » Although that level seems hard to imagine, Elliott Wave and Fibonacci theories remind us that it's nothing personal. It's just business -- and mathematics. I've shown it here with similarly outrageous forecasts before parabolic rises flamed out -- in cotton, wheat, sugar, silver, TiVo (TIVO), Delcath Systems (DCTH), Dendreon (DNDN), Imax (IMAX), Akamai Technologies (AKAM), JDS Uniphase (JDSU), Travelzoo (TZOO), Nvidia (NVDA) and F5 Networks (FFIV), to name a few. When the bough breaks, the cradle falls, regardless of whether the baby's parents thought it could.

Catching the Wave: When the Bough Breaks

Though a gold decline below $1,000 per ounce seems hard to imagine, Elliott Wave and Fibonacci theories have made similarly outrageous predictions in the past that were ultimately fulfilled.

Columnist Conversation

Insider Buys in Two Stocks I Like

This Weekend on Real Money

Webinar Time After the Close Thursday

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.