XAO Long Term Update - May 2012

This post is an update to the long term chart here and updates the current view (no change to the wave count). What's different is the ending of the wave 'B' circle - ending a triangle. Some suggested downside targets are included based on Fibonacci relationships of wave (1) down of wave 'C' circle and updated downside targets based on Fibonacci relationships of wave 'A' circle.

A downside target of 2350 is an interesting target area as it represents several relationships: 61.8% of wave 'A' circle and a relationship of wave (1) down: using wave (1) = wave (5) and wave (3) is 161% of (1) will give an approximate target of 2350.

The extreme downside targets are also valid since they correspond to previous wave 4's of different degrees:

• 1500 for the 1987 wave 4, and
• 300 for the 1975 wave 4 of one larger degree

The 900 target area represents wave 'C' circle = wave 'A' circle and would be another target of high interest.

Think any of these target areas are unrealistic? Just take a look at the MSM financial assertions and the postings from numerous people in the 'know' on the internet as wave 'A' circle started to unfold back in 2007 - hardly anyone believed the XAO could more than halve in value in under 2 years. Are we on the precipice of a new bull market to regain all those losses or is there more uncertainty than ever before?

XAO Medium Term Update

The XAO is declining as previously anticipated with some strong support at the 3940 levels approaching.

The medium term view for a zig-zag correction on the XAO is shown below with the index anticipated to ease on the declines in the lead up to Christmas. Under the count below, the wave '2' top should not be broken.

XAO - Next major leg down underway?

From the previous XAO post - clarity would soon be shed on the XAO medium term direction and it's not good news.

In fact, this leg down could be very aggressive - Over two years ago this October 2008 post (on ASF) for the long term view provided some rough guidance on how the XAO would play out over the coming years: wave 'A' circle to complete, a corrective wave 'B' Circle to unfold, and once completed 'GFC II'  aka wave 'C' circle would be unleashed.....However, wave 'B' Circle took a lot longer to unfold as a more complex correction.

October 2008 View - zig-zag correction on the XAO

XAO Short Term View
The short term view is for 5 waves down to unfold before the first major bounce occurs. The MACD is at an extreme, implying the end of wave '3' down is complete. It is assumed a triangle will unfold for wave '4' that will see sideways action for 2-3 weeks before another push lower to complete this first of a series of 5 wave declines.

The social mood will continue to decline dragging the stockmarket with it - riots in Europe are a precursor to bigger things to come.

XAO Multi-Year Outlook

The overall outlook on the XAO is extremely bearish based on Elliott Wave analysis (in addition to the massive problems globally with debt that ain't going away anytime soon).

The view below builds on a much larger outlook here that simply implies that XAO needs to return to the long term trendline  - some would call this GFC II or a double dip recession. Obviously there are other possible scenarios that may play out - but at the moment there is enough evidence in the elliott wave count to suggest a large correction of some form is occurring (I'm assuming a simple zig-zag correction based on an initial 5 wave decline).

A suggested target for the upwards 'B' wave circle at 5325 based on a Fibonacci ratio to keep the index under 61.8% retrace (5416). Driving above 5416 would have me reconsider the count as a 'B' wave in a zig-zag should not typically retrace more than 61.8% of the 'A' wave.

This top would complete around the start of August, hmmm, I wonder if that's when the 787 dreamliner will be released?

Long Term XAO - multiple areas of resistance

The XAO has encountered several areas of resistance shown and/or discussed in the chart below - this should indicate caution as a potential change in trend is at hand. Also on the shorter term, it appears 5 waves up can be considered complete for wave (c) within the large wave '2' structure discussed in previous posts.

Breaking confidently higher (esp on higher volume) would indicate an alternative count is possibly unfolding at least in the short term.

XAO - The bigger picture

The Bigger Picture of a Zig-Zag correction on the Australian All Ordinaries

A few posts back I provided a long term chart of the XAO that covered the last 120+ years, one key point shown was the clear break from the very long term trend line from 1975 onwards. This date and one other - 1987, are two key dates on the chart that represent wave 4's of different degrees of trend. I'll come back to the importance of these dates later.

The first assumption on the chart below is that a zig-zag (5-3-5) correction is unfolding on the XAO  on such a scale that hasn't been seen in decades and probably won't be seen again in anyone's lifetime. Supporting this outlook is an initial 5 waves down from the 2007 top completed in March 2009 - labeled as 'A' circle. This is an ominous sign as 5 waves down requires another 5 down to complete a corrective phase.

'B' circle is assumed complete and is a 3 wave correction, leaving wave 'C' circle down to unfold.

The downside targets of wave 'C' circle are shown on the linear scale chart below. Several downside targets are represented - with 1261 being the wave '4' triangle correction in 1987-1992 and an extreme target that represents the wave '4' of next higher degree from 1975 (Corrections will usually aim to complete in the vicinity of a previous wave '4' or further)

1975 was the start of the most aggressive leg of the credit era and there is strong belief by a few analysts that this credit era needs to unwind - aggressively. Unwinding of the XAO back to the century long trend line would see the XAO at around 1000-1200 points, or in other words the 1987 wave '4'. 

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.

Trends
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).