SMI | Hamilton's E-Wave Analysis

We were correct in stating, the other day, that the DAX did not have the time to have a thrust up. Like all markets, not surprisingly considering the abundance of B-waves (see for instance Siemens, SI.) the DAX went down like a rock and now sits at about 18% below the top, having lost about 38% of the gains made since the lows in March of ‘09. Others have done worse, see below Zurich’s SMI.

Where from here? I think it is pretty clear that we had an A-B-C up,with the B as a triangle. This is a correction and therefore we should see a new low below the March low. Unless we are making a far more complex structure, perhaps a multi year triangle. For the moment that is of little concern as the present leg down is not complete. We still require a 4-5 of 3, and the a 4th and 5th wave to complete this down-leg. A reasonable initial target would be about 5100. That level is at the lowest point of the triangle B and also about a 60% give-back of the entire rally of the last 2+ years.

The Zurich index had gained roughly 2750 points the year after the low. It has been in decline for a year and 1/2 and has lost 1750 points or about 60%. That is a nice Fibo # and could signal that it is complete. However this is highly unlikely because the pattern certainly is not. In any case it is not unreasonable to assume that the DAX could also drop this much. Note that any chart using Swiss Francs as a measuring stick looks awful. Expressed in US dollars the drop would be a lot less pronounced.

A few years ago Zimbabwe’s (Rhodesia) stock market was the best performer. Nothing else in that country was except perhaps inflation that had gone through the roof. This is almost counter-intuitive as one would think that allowing the currency to degrade (a by product of inflation), would lead to a bad stock market. Clearly this is not true and the simple reason is that stocks represent, in the main, real assets and these should appreciate relative to the currency .

If that is true for Zimbabwe, the reverse should apply to that bastion of financial probity, Switzerland. The above chart is that of the Zurich index, the SMI. That is the big picture. In more detail below with the currency;

Note that the SMI is now trading at roughly the same level that it was at, 3 months after hitting the lows in march (The AEX , MIB, and CAC40 are doing similar things but a little less pronounced). The correlation with the Swiss Franc is spotty at best. It would seem that within normal ranges, whatever that is, the correlation is positive but once things start to hit the shoulder of the road, that changes rapidly and it becomes negative. The Central bank today lowered its interest rates in a surprise move, citing the “massive” over valuation of the currency. The timing is actually not that surprising if you look at the top chart (see also an earlier blog). The channel that has held for the past 30+ years , except in 2009, was once again threatened. It may well bounce here but ultimately we should reach 3500 at the very least. America is exporting deflation, and the Swiss do not like it.

Share this:

Share this: