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 - 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 - 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.

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.