Gold

Gold is the flavour of the month with Gold news being pervasive in the media, forums and by the analysts, hence a top may be at hand.

Back in February I posted a few charts on ASF on the GOLD thread and indicated that it appeared a wave (4) was unfolding, possibly as a flat.

This would mean one last push to new highs would complete 5 waves up.





Well, wave (4) has completed (as a triangle) and wave (5) is underway. The second chart below shows a narrow wave (4) triangle and a thrust upwards out. Under these conditions, caution is required for those buying into the GOLD hype that is evident in today's markets.

A push to US$1200 or a little over would make wave (5) equal to wave (1).

Waves of Emotion - Part 1

There's been a couple of projects that I've been working on, one of which is to determine if there are any direct human indicators that provide a reliable method of predicting an impending turn on the All Ordinaries index.

The logic under consideration was: If Elliot Waves are based on social mood (at all degrees of time scale), therefore it should be possible to identify emotional actions/responses to help identify waves that appear in the stock market.

So the answer is yes - of course. The first chart is analysis of a particular discussion forum thread and plotting the dates and quantity of posts on any given day. The correlation between posts and the following bounce within a few days on the XAO is almost 100% accurate. Hence, by simply watching threads on discussion forums (very selective threads) it is possible to use them to help in one's trading plan - at a minimum as a warning indicator.

If we overlay Elliott waves to these post we notice a couple of things:

1) Posts relate directly to the start of Waves on the index as well as the type of wave that unfolds. For example, with waves '(4)' and '4' (both being triangles) there is a series of posts at the start of waves 'a' and 'c' in the triangles. Triangles have a sideways direction, so it stands to reason that posts will support this sideways flow.

In contrast, the waves (1), (5), 'X' circle show a large number of posts before and on the day of reversal to new short term highs.


2) Time scales: The discussion posts tend to relate to waves of Intermediate and Minor degree of scale. Other human emotional actions/responses will be seen at other degrees of trend as well, just not necessarily discussion forum threads. For example, those who trade on the Stock Exchange floors can probably see the emotion at much smaller degrees of trend (eg 1, 5, 60mins).

The next part of this project aims to identify the tops of Intermediate and minor degrees of trend.

September Market Update

The latest September Market update has been published on the ASF here

Membership will be required to download the PDF.

XAO - Medium Term Outlook

On the daily chart it appears that one more upwards thrust is required to complete the second zig-zag in a double zig-zag correction for wave 'B' circle.

Under this scenario, I would envisage that the XAO will get close to or break the upper trend channel line shown in the diagram. This means a target area of around 4700-5000 points.

It should also be noted that this wave 'B' circle may be only 1 wave in a multi-wave correction that will last for many months. However, it is too soon to speculate if such a scenario will actually play out. My assumption at this stage is that once wave 'B' circle completes (as shown), the next major leg down will be underway (until proven incorrect).

XAO - Medium Term Outlook

The XAO Medium term structure has been updated as the Wave (3) expanding triangle scenario has been proven to be invalid by exceeding the June 12th high and continuing higher (also invalidating a elongated flat for the next triangle leg down) . The last medium term outlook here describes the wave (4) expanding triangle scenario.

After looking at a number of possible scenarios, the evidence at hand indicates wave (4) completed at 19th Feb 09, and the completion of 5 waves down on 10th Mar 09 as shown on the chart.

Fives Waves Down
Fives waves down is a bearish indicator for the XAO (and has always been anticpated regardless of the route to a completed 5 waves down). Another 5 waves down needs to complete this ongoing bear market - corrections cannot be constructed from 5 waves, minimum of 3 waves is needed. This first wave has now completed - wave 'A' circle, wave 'B' circle is the second wave and the final wave down is yet to start (or about to).

Counter Trend Wave
The wave 'B' circle counter trend upwards thrust from the low is moving in waves of 3 - a key indicator that the upwards thrust is corrective. The 38.2% retracement has almost been touched and can signal the completion of this counter trend wave (light blue) or signal a several week correction before moving to new highs (orange).

The case for wave 'B' circle completion will fall into 2 categories:

1. More Complex Correction: The leg upwards may be only the first leg of a 3 wave correction where wave 'B' circle may in fact take longer to complete and may retrace further. Hence, wave 'B' circle on the chart above would only be the first wave of a 3 wave complex correction upwards or sideways.
2. Completion? So far: Time wise, wave 'B' circle has taken 31% of the time to complete versus wave 'A' circle. Price wise, wave 'B' circle has retraced almost 38.2% of wave 'A' circle. This suggests that upwards wave 'B' circle has completed a minimum amount of time and price to correct the whole decline from Oct 2007.
   

XAO - Short Term view

Several options exist for the short term count, two are discussed here:1)

Ideally a decline would count well from here since an ‘a-b-c’ correction can be considered complete as of today to finalise wave ‘ii’2)

In this colour, 3900 has been broken and we need to consider an alternate count. The whole wave (ii) correction could be considered an expanded flat. The ‘b’ leg can be interpreted as a three wave move or a 5 wave move. Since ‘b’ waves need to be comprised of 3 waves, an expanded flat is a possibility3)

Other short term options exist as well, but remain in the back seat until the current short term wave counts have been proven invalid or clarity is forthcoming.

XAO - Short term correction

The XAO is correcting into wave 'ii' and should complete shortly at perhaps around 3800 or alternatively may form a more complex correction that will last a few more days.

Exceeding the 3900 mark would have me reconsider the current wave count. As of now, the whole move down from the end of wave 'C' can be considered a completed 'a-b-c' correction. Hence, break above what has been outlined would have me rethink the count.

XAO - Supporting evidence for further declines

The current wave count suggests that the XAO will soon break thru support and head further south to lower levels.

In the short term, there are a couple of scenarios that could play out depending on the subdivisions that unfold for wave (iii) down.

Either a small wave 'iv' upwards needs to unfold now or a further drop needs to occur for more of an aggressive wave (iii) down.

There is solid support at 3500-3470 where a bounce into wave 'b' circle upwards could occur, thus marking 5 waves down complete. At 3470, this is 61.8% retracement of the previous leg upwards and offers a suitable target for a bounce.

XAO - Short Term view

The XAO short term view (60min chart) shows that wave (ii) has likely completed yesterday.

The rationale is that:

1. An expanding 'b' wave triangle is evident within wave (ii), suggesting completion of wave (ii) was imminent.
2. The decline today retraced wave 'c' in less time than it took to develop - a key indicator that strongly suggests the next leg down is underway.

There is a chance that wave (ii) could subdivide and form a more complex correction, hence the decline today could be part of the 'X' wave - but it's not a favorable option at this time.

Some of the rationale behind this is that the Resource sector (XMJ) has retraced only just over 23.2% of the decline. Whilst this is perfectly acceptable, there's a chance that additional corrective action could unfold (eg a double zig-zag).

XAO - Still declining from a short term top

The XAO is still declining and the next several days will help determine what wave structure unfolds. Ideally, the wave count shown should unfold and provide a short term bounce.

However, I'm also half expecting this leg to sub-divide further and potentially drive thru the 3700 support (also 38.2% retracement of wave 'C'). If so, then I would be tempted to label this leg down as wave 'a' circle once this leg completes. Under this scenario, 3500 would be a potential target area for a bounce.

Overall, the key is to see a 5 wave decline from the end of wave 'C' in order to expect a short term bounce upwards.

Australian Resource Sector (XMJ)

The XMJ has been correcting since November last year and has unfolded as a Double zig-zag correction (so far) for either the (A) wave of a much larger correction or 'B' circle wave to complete the correction.

The first chart here, was posted on ASF back in April and provided two likely wave structures for the XMJ: Either wave (A) had completed and the index was heading lower or another push up to complete a more complex correction (double zig-zag) was needed.

The double zig-zag played out and took the index higher, which has now topped mid-June at around 11200. So the question now is: Will the index complete wave (B) lower and fulfill a long term flat correction that effectively sees the index playing out sideways for many months? Or will the index head lower and commence the next 5 waves down? In any event, it is extremely likely that a significant down leg is now unfolding.


Considering that the current count on the XAO is calling for an expanded triangle, I'm giving the odds in favour of a flat on the XMJ. Hence, wave (B) and (C) need to play out. The second chart here from 17th June, outlines the preferred wave count. This may mean that the XMJ won't see a new low (perhaps Double bottom, or close to) until wave 'B' circle completes.

XAO Medium Term Outlook

I thought I would provide some context to the shorter term charts, so you'll find the XAO medium term outlook for the current wave count shown on the left.

I took a look back at some medium term charts from last year that contained estimations based on Fibonacci relationship and an assumed 5 wave decline from the 2007 top.

So far, the XAO has approximately followed the estimations with the exception of the current expanding wave (4) triangle that will take some time to unfold. I had assumed that a contracting triangle would unfold in the wave (4) position and didn't expect an expanding triangle as they seem quite rare on the XAO.

I haven't taken a close look at the time relationships between the waves as yet, something I'll do shortly.

Wave (5), (not shown) may result in a 5th wave failure because of the expanding triangle - hence there is a high probability that there will be sideways action for quite some time (eg trading in a 800+ point range)

XAO Wave 'D' down underway

Recession fears cripple stocks
That was the headline on CNN Money this morning, I thought we were already in a recession/depression/major correction/or something - when you can't pin the market action on an event - make up a headline, a usual Media tactic.

Another way to interpret the recent down leg is that wave D of an expanding triangle is now underway on the XAO.

The 4070 mark was hit and exceeded last week topping at 4079 or almost spot on 61.8% of the previous 'a' circle leg. The 4079 level should not be broken in the expanding triangle scenario - if it is, then something much more complex is unfolding. The wave structure from the recent top is moving in 5 waves down, so there is supporting evidence that more downside is to follow. This supports the probability that wave 'D' down is underway.

A rough short term wave structure is provided that suggests a retracement is needed soon before wave (iii) takes hold for more aggressive downside (should this short term wave structure unfold, then technically a head and shoulders pattern would unfold).

Wave 'D' should head to new lows (possibly to 2700-2800 on the XAO) before wave 'E' upwards kicks in.

XAO Wave 'C' at a top?

Wave C in the longer term Expanding Triangle scenario may have topped today, with the final wave 'v' looking complete and being approx 61.8% of wave 'i'.

There is potential for a little more upside, but looking purely at the probabilities and the XAO's love of 61.8% fib ratios between waves moving in the same direction - extreme caution on long positions is now warranted.

There is also a close fib ratio between this final leg and the previous 'a' circle leg as well - wave 'c' circle being almost 61.8% of 'a' circle. Breaking below the bottom of wave 'iv' and then wave 'b' circle should signal the next down leg (pending the analysis of the unfolding wave structure of course).

XAO - Expanding Triangle for Wave (4)

Wave 'C' Not yet completed. Under the Expanded Triangle scenario, Wave C has continued to new short term highs but has provided more clues to it’s structure – namely 4 small waves up ‘i-iv’ have completed (wave iv may still have one more leg to complete). The wave ‘b’ circle has unfolded as a triangle, but an additional triangle unfolded within this correction to add complexity in calculating it's ending point.







Short Term. Five waves up on the last leg of wave C should complete very shortly and provide a turning point just above the 4000 mark (to around 4070). Wave ‘iv’ may not yet be complete, therefore some minor downside could unfold before heading higher to complete 5 waves up.



Overall Wave (4) target. It should be noted that wave 4’s tend to retrace 38.2% of wave 3’s – this would put a completed wave 4 retracement at around the 4300 mark on the XAO. Therefore a drop into wave D down (to a new low) and then back up into wave E at around 4300 would be a reasonable estimation for a completed expanded triangle scenario. Wave (5) down would then commence.

XAO - Expanding Triangle for Wave (4)

XAO - Expanding Triangle for Wave (4)

The Wave 'C' up leg in the Expanding Triangle Scenario for the XAO could well be complete (or very near completion with an additional sub-divison that takes the XAO above 3950).

The 3950 target was almost reached today and is a site of solid resistance and does provide a suitable area for a turn down into the wave 'D' leg of the Expanding Triangle.

Timewise there is relationships between the two upward sub-divisons of wave 'C'. The 'a' circle leg and the 'c' circle leg (not labelled) - the 'c' leg is 63% of 'a' - a very close 61.8% fibonacci relationship of time.

I've also include the MACD signal line, a short term high representing the end of wave 'iii' shown with the dashed line, and the subsequent divergence of the MACD as price hits a new short term high (representing wave 'v').

XAO Next Steps

Prices need to turn down from here (or perhaps after one more small push upwards) for the Expanding Triangle to continue to be a top contender. Five small waves down and a break of the short term trendline will be an indicator that suggests a turn has started.

Looking at the wave structure since the 21st Nov, I'm finding it hard to see other wave scenarios under the current long term count. A triangle is highly probable for wave 4's, in this case it would need to be an expanding one.

XAO - Still correcting

Continuing on from yesterday's post discussing the suspicion that a more complex correction was unfolding was justified today.

The Australian All Ordinaries flip flopped into negative and positive territory throughout the day, but the underlying action implies that an expanding flat (3-3-5) correction is unfolding.

Wave 'A' and Wave 'B' are both 3 wave moves which increases the odds that a flat is forming and the higher low before the close supports the end of wave '2' up

The XAO action after today needs to push higher tomorrow and develop a small wave '3','4' and '5' to complete the 'C' leg of this correction and a break above 3545 would certainly support the expanded flat scenario.

XAO - The start of Wave (5) down?

I thought I'd post something that looks at the smaller wave count today (noting that what is discussed here can be applied to wave structures at any time scale, so if you want to imagine a daily chart then feel free to do so :-) )

What's interesting about this wave structure is that the wave '2' zig-zag is almost too perfect. Glenn Neely highlights these formations with some caution as the wave '2' correction may not be finished if the entire structure (a-b-c) is contained within the parallel lines (sloping up to the right), which it is except for a very small throw over at the end of 'c'.

In addition, the thrust downwards after wave 'c' seems weak and has not broken the start of wave 'c' in less time than wave 'c' took to form. Hence, looking at individual waves and the time each has taken to form can provide confirmation of the completion of zig-zag corrections. This concept is explained in Glen's book mastering Elliott Wave in more detail.

There is therefore a real possibility that this wave '2' correction is yet to complete and a more complex correction to unfold. Breaking below the end of wave '1' in a small 5 wave move would provide stronger confirmation that a more complex correction is not unfolding.

WOR - Ending Diagonal Complete

Discussed last Wednesday, WOR looked like it was forming an ending diagonal for wave '5' of 'C', completing a Flat (3-3-5). The wave structure suggests that this has now occurred and there should be a pullback, possibly to a new low.

Whether a more complex correction is to unfold remains to be seen, but the short term wave counts on a 15min or 60min chart will clearly highlight the finer details of the declining wave structure. Should five clear waves down on the daily chart become visible, then this will provide some reasonable clarity on the directions of WOR in the coming weeks.

XAO about to reach an important juncture

The XAO is about to reach an important juncture that will validate one of the two scenarios shown.

The first Scenario shows the leg down that started in 2007 completed. The evidence supporting this scenario is the latest market action that is unfolding in 5 waves up.

This alone doesn't necessarily indicate that a temporary bottom is in place. The ending wave count looks a little unusual as well - wave (4) would need to be a triangle that looks a little strange as far as triangles go. However, we must still look at the possibility that wave 'A' circle down is complete. One will need to look at the next pullback with caution as it could lead into the 2nd scenario instead.

The second scenario sees wave (4) still underway as an expanded flat (or even a triangle - both alternating well with wave (2) ). The current wave structure suits this scenario a little better than the first. Two 3 wave moves are complete - 'A' and 'B'. Wave 'C' needs to be a 5 wave move upwards (which is exactly what's unfolding - so far). In addition, when comparing wave (1) down with wave (5) down - the waves are in complete contrast in the first scenario - wave (5) is simply too small. The second scenario would see wave (5) down yet to commence.

Right now, I'm allowing for both scenarios and both support a short term trend upwards. The next reasonable pullback (down to around 3400), that should occur soon, will provide further evidence as to the unfolding wave counts.

XAO - Triple Combination

Based on the short term waves, I'm really not satisfied that we're seeing impulse moves upwards in this latest rally. Even though at first glance 5 waves appears unfolding. In any event the answer should be with us very soon.

What may be unfolding instead is a triple combination - three 3 wave moves (with intervening 'X' waves) with a triangle for the last wave. Double combinations are more prevalent on the shorter term waves, so seeing a triple at this scale would be interesting to see confirmed.

Because of the triangle at the end of these corrective waves structures, many analysts will believe a wave 4 triangle is unfolding and expect another leg up.

If the above analysis is correct, we should see the rest of the triangle play out (tomorrow hopefully), and then a strong thrust to the downside once completed.

EUR v's USD

The Euro surged against the USD overnight, hitting 1.35 up from around 1.30.

This surge can be considered as part of wave 'E' as the last leg in a multi-month triangle. This interpretation fits into a bigger zig-zag correction (5-3-5) scenario where this large triangle is corrective wave (B).

Triangles indicate the current trend will soon change (or at least correct). Since the trend is down, then one more wave down needs to unfold - in this case Wave (C) as a 5 wave move.

Wave 'E' of this triangle, the last wave to complete, should end very soon - perhaps up to the 1.38 area (or even higher, but cannot move beyond point 'C'). Once complete, there is an expectation that wave (C) will commence and head down to the 1.15 - 1.10 area.

The completion of this large multi-month zig-zag correction should see the EURO re-commence the longer underlying trend upwards.

WOR - Flat Correction for wave (4)

It appears that WOR is in the final stages of a flat correction (3-3-5) and the last leg - the C wave is finishing 5 waves up.

The final thrust appears to be developing as an ending Diagonal - a 5 wave overlapping move. One last push to a new short term high is needed to complete this move.

Looking at the overall wave structure, wave A is a 3 wave move, wave B is a 3 wave move and wave C is 5 waves - thus making a larger 3-3-5 flat wave structure. A larger correction could still unfold and this whole structure would become 1 wave in a larger multi-wave move (eg a Triangle)

Identifying Waves of the same Degree

Identifying waves of the same degree. For many EW analysts, it can sometimes be difficult to determine how Elliott Waves are labeled correctly. Wave alternation (different look, price or time action) helps, but also looking at the price and time action on corrective waves can also assist.

Usually if the price and/or time of corrective waves is more than 1/3 of the previous wave, then the correction could be labeled at the same degree as the previous wave. See examples.

XAO - 5 up
A small five wave move up on the XAO looks complete. It has also hit some key resistance levels @ 3350 as well x2 Fibonacci retracement levels of 38.2% ( from wave (4) ) and 61.8% (from wave 'b' circle).



The completed 5 waves up indicates a retracement should be forthcoming then (at least) another 5 waves up to form (at a minimum) a zig-zag correction (5-3-5). The ultimate target of the XAO may be around the 3500 level where again there is strong resistance and 61.8% fib retracement level.

The impending short term retracement (a 3 wave move, or a triangle) could take the XAO back down to 3250 (a 38.2% retrace of the recent leg up) or to just under 3200 (a 61.8% of the recent leg up) and also hitting fib levels from wave (4) and b circle as shown. As some have already suggested in the forum, this retracement may be an opportunity.


Wave (5) Down - Ending Diagonal?
The leg down from the end of wave (4) is a three wave move. So this evidence suggests either an ending diagonal is forming or wave (4) is still unfolding.

The way I've labeled this chart is to imply a large ending diagonal is unfolding. In an ending diagonal scenario, 5 waves will form but all waves will contain 3 wave moves and waves 2 and 4 will overlap. So far, wave 1 contains a 3 wave move - wave 2 up is now underway with the 1st wave of three looking complete.

Should a larger 5 wave move upwards unfold, then I would consider wave (4) still unfolding and will be a triangle.

I should also point out that the recent 5 wave move upwards could be part of an expanded flat correction as the completing waves at the bottom end of the chart are a little messy and hence can be hard to interpret - So I've also got this scenario catered for in the back of my mind (eg driving under a 3200/61.8% retrace would start to get my attention). If true, the downtrend would be underway once again.

Note: Ignore the lowest bar at the bottom of the chart - that's a 62 point data anomaly from last week