SURGING EURO KEEPS RISK-ON TRADE AFLOAT -- AGRICULTURE ETF CORRECTS WITH FALLING WEDGE -- CORN INDEX BREAKS TRIANGLE RESISTANCE -- ELLIOTT WAVE COUNTS SHOWS S&P 500 IN 5-WAVE DECLINE -- CURRENT BOUNCE LOOKS LIKE CORRECTIVE WAVE 4

SURGING EURO KEEPS RISK-ON TRADE AFLOAT... Link for todays video. The Euro Currency Trust (FXE) broke medium-term and short-term patterns to signal a continuation higher. Chart 1 shows the Euro Currency Trust (FXE) within an uptrend overall. First, notice that the ETF formed a higher low in January and moved to a new high in early May. Second, notice that the May-July decline formed a falling wedge correction back to broken resistance. Third, the ETF broke above the wedge trendline in late July. After a falling flag pullback below 142, the ETF resumed its upward trajectory with a break above 144 this week. Both the Euro zone and US have their issues, but currency traders appear to favor the Euro over the Dollar right now. This could have positive implications for oil, commodities and the Dollar. Chart 2 shows the US Dollar Fund (UUP) breaking triangle support in late July and flag support this week. Weakness in the Dollar is benefitting gold. Chart 3 shows the Gold SPDR (GLD) challenging last weeks high with a surge back above 174 this week.

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Chart 1

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Chart 2

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Chart 3

AGRICULTURE ETF CORRECTS WITH FALLING WEDGE... Commodities have been moving the way of the stock market the last few months. Oil, base metals, agriculture and stocks are all down for the year. This means they are positively correlated with stocks and do not offer a good means for diversification. Chart 4 shows the Agriculture ETF (DBA) with a falling wedge since March. Technically, the trend is clearly down as long as the wedge falls. Admittedly, this pattern looks corrective because of its long slow decline. Also notice that prices have been largely flat since May. There is a clear resistance level based on the June-July highs. A move above this level would reverse the wedge decline and call for a continuation of the prior advance.

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Chart 4

The Agriculture ETF (DBA) is a broad-based fund with 10 agriculture-related commodities. Cocoa (10.56%), Coffee (11.81%), Corn (15.30%), Live Cattle (12.22%), Soybeans (13.07%), Sugar (11.42%) and Wheat (10.41%) are the main drivers.

CORN INDEX BREAKS TRIANGLE RESISTANCE ... Chart 5 shows the iPath Agriculture ETF (JJA) with a similar pattern. Consisting of seven commodities instead of ten, JJA is different and less diversified than DBA. In particular, corn (26.23%) and soybeans (26.31%) make up over 50% of the ETF. Despite this difference, the overall trend and chart pattern are not that different. The iPath Agriculture ETF formed a falling wedge/channel the last six months. A move above the July high is needed to reverse this downtrend. The indicator window shows RSI hitting support in the 40-50 zone during the uptrend and resistance in the 50-60 zone during the downtrend. A move above 60 would confirm a breakout on the price chart.

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Chart 5

StockCharts.com users can track soybeans, corn and other commodities with a Dow Jones-UBS Subindex. Simply search the symbol catalog for UBS or Subindex to see the available symbols. Chart 6 shows the DJ-UBS Corn Subindex ($DJACN) with an extended advance and consolidation. Broken resistance around 18 turned into support in March and July. The index formed a small triangle after the July surge and broke the triangle trendline this week. Chart 7 shows the DJ-UBS Soybeans Subindex ($DJASY) with a long triangle extending back to February. A move above 215 would break resistance and signal a continuation higher.

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Chart 6

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Chart 7

ELLIOTT WAVE COUNTS SHOWS S&P 500 IN 5-WAVE DECLINE EMERGING... Chart 8 shows the S&P 500 as a 5-day EMA for long-term Elliott Wave analysis. The advance from July 2010 to May 2011 formed with five waves (green numbers). The current decline appears to be forming a five wave sequence. This means the current decline is the start a new impulse move lower (I) or the start of a big ABC correction (A). ABC corrections trace out a 5-3-5 sequence with Waves A and C forming five ways. The target for an extended ABC correction would be the low of the higher degree Wave 4 (black IV). This targets a decline to the 1050 area by the time Wave C ends. In the meantime, the index still has to reverse the Wave A decline and bounce with Wave B. Should the current five wave decline be impulsive, a Wave II bounce would follow the end of Wave I (black). Whether Wave I or Wave A, the prospects are not bullish for the next several months. An extended ABC correction or new 5-wave impulse both point to lower prices.

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Chart 8

CURRENT BOUNCE LOOKS LIKE CORRECTIVE WAVE 4... Chart 9 shows a 3.5 month chart for the S&P 500 ETF (SPY). This shorter timeframe provides more granularity and detail. The first objective when making an Elliott Wave count is to find the strongest wave. The decline from 134 to 112 is the strongest wave and most likely an impulse wave, which makes it a third wave. With this base, we can then work backwards and forwards to see if the other wave counts fit. The May-June decline looks like Wave 1 (red). The June-July bounce looks like Wave 2. According to Elliott Wave theory, Wave 2 tends to be sharp and retrace a large portion of Wave 1. This Wave 2 appears to breakdown into four sub-waves (i to iv). This means the July-August decline was iii or 3. This also makes sense because the third wave of a third wave tends to be the most dynamic.

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Chart 9

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Chart 10

The current bounce would therefore be some sort of forth wave, which is corrective. Is it a little four (iv) or a big four (red 4) that has further to extend? Note the alternative projection (pink lines). It is possible that Wave 3 (red) ended in early August. Last weeks double dip produced waves iv and v to end Wave 3 (red). If this is the case, then SPY is in the midst of an abc correction for Wave 4 (red). This implies a shallow dip for Wave b and another bounce higher for wave c. The entire abc sequence would end Wave 4 and we could then expect Wave 5 down in Sep-Oct. A Wave 5 low in October fits with a few cycles, including the famous 6-month cycle.