Stocks: Even if a rally through 1104-1105 were to occur, we do not believe that would change the big picture outlook as described in our January “Year Ahead” piece. We continue to believe that a challenge of the January high would result in more numerous and more important negative divergences than those that already exist. It would be a condition not unlike the divergences that appeared in October 2007 as the market penetrated the July 2007 high.
10-Year Yields: In recent days, yields have rallied through near term resistance at 3.71% and have pierced (at least temporarily) the downtrend line from the December peak. However, a case can be made that this rally is a “C” wave within an ABC rally pattern from the late January low at 3.58%. As such, this rally has only retraced a normal 50%-61.8% of the December-January decline. So, at this point, it is “no harm, no foul.”
US Dollar: The Elliott and momentum evidence suggests that a near term pullback will likely be a pause within the dollar’s current rally trend. However, a more important top may not occur until the intermediate pressures begin to build in March-April.
Commodities: From an Elliott wave perspective, g July lows represent the end of a fourth wave triangle so a reversal would bolster our view that the minimum requirements for a complete multi-year five-wave pattern had been satisfied. From a non-Elliott perspective, the breach of the post-July uptrend line would imply larger uptrends from April 2009 and possibly from late 2006 had also been reversed. All of this raises the prospects that the decline from last December’s high is the opening salvo in a cyclical decline.
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