Sunday, July 11, 2010

XAO Long Term Trend

I was kind of inspired to write this post after watching about 5mins of 60 minutes tonight which had a segment on the Global Financial Crisis and the ongoing impact to retirees. The GFC has had an incredible impact to many retirees and those expecting to retire in the next few years - it became quickly apparent that another major downturn will have perhaps an unrecoverable impact for many. I think the general view from those interviewed was the 'hope' that the GFC has ended and a slow recovery is underway.

It always amazes me the number of folks that swear that analyzing trends and establishing trend lines are key to developing a investment strategy, however, the use of trends suddenly become "relaxed" on the very long term charts because they "don't apply" anymore or the market has "changed". My point is that trends on any scale are important, it just so happens that major corrections don't come along all that often for many to worry about (until it's too late of course).  The market works in cycles, hence major corrections have occurred and will occur again - Trends will help establish the starting and ending points of those cycles.

120 Years of Progress
One thing is for certain, once a trend line has been established the stock or index will eventually meet or break that trendline once again. The 100+ year All Ordinaries is a good example of a massive departure from the underlying trend starting in the mid 70's (start of the credit era).

The chart below provides an Elliott Wave count of the XAO for the last 120yrs. A meeting of the trend line is around 1000 points - a scary thought. What would you say if the chart below wasn't a 120 year chart, but only of 120 days instead? You'd probably think that a correction back to the trend line would be fairly normal and fit well within your investment strategy. As you can see - the issue isn't with the trends and the corrections that occur within the trends, but with TIME.

It is fairly normal for markets to correct on the long term charts, it will punish investors that are not looking at short and long term trends and a strategy to avoid risk if such a scenario should unfold. Sorry, hope isn't one of them. Some of those interviewed clearly understood this and have taken back control of their hard earned finances (which was good to see).

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