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).

XAO Ready for a Fall?

In this post here, discussed were 2 highly probable possibilities for the ending of wave 'B' circle - either it was already completed or another push higher needed to occur.

As I write this, the XAO is nearing a significant threshold - if wave 'B' circle has in fact completed, then a strong push to lower levels should soon occur and provide a good indication that wave '3' is underway. Otherwise a less likely scenario in that the recent drop from the 5000 level is a 3-wave correction that has ended or needs to unfold lower before completing. Either way - having an understanding of the most probable scenarios will provide an early warning should the preferred scenario not play out as desired.

A break upwards and out of the down sloping channel will provide evidence of further upside potential or more sideways action of an incomplete wave '2'.

Many in the mainstream media claim that the Global Financial Crisis is over and a recovery is underway (although only lukewarm). However, analyzing the financial stability of many banks (in the US and Europe) seems to portray a vastly different picture. The evidence is yet to confirm that the financial sector is on stable ground - I suspect another wave of failures and losses is not far away.

XAO - Holding above 4500

The XAO has pushed higher as indicated in the last post, however, the next one or two trading days should provide a lot more clarity as discussed in the chart below. Today's action had many scratching their heads since the DJI was up 400+ points at the close, yet the XAO declined 49 points in today's trading.

XAO - 4500 is broken

In the last post I indicated that under an expanding triangle scenario, the XAO would need to come close to the 4500 level. Today that occurred, apparently due to 'concerns' about Greece, the new mining sector tax or potentially the weather :-)

Keeping above the 4500 level now is imperative for the expanding triangle to remain as a primary count - hence a series of clues will be provided by the XAO over the next few trading days.

A closer look at the final wave (e) leg is below. Under an expanding triangle, wave (e) should nearly always be the longest wave.

XAO - More Potential Upside

The XAO has been trending sideways since October 2009 which can be  representative of a large correction. This correction could be a (B) wave Expanding Triangle (as shown) or a flat [the first blue (a), (b), (c)].

As corrections can be difficult to gauge until near complete, following the trend using parallel channel lines can be very useful in determining individual segments of waves. In addition, the MACD Price Oscillator provides insight when waves are near completion (eg Extreme signal on completion of wave 3 at various degrees of time).

 The potential action over the coming weeks calls for a correction upwards in the short term and one final push down to compete the last wave of the expanding triangle (to perhaps the 4500 level). Should this not unfold, then the final wave upwards to wave 'B' circle can be assumed to be already underway.

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).