XAO Short term action

There's several Elliot Wave interpretations for the short term Australian All Ordinaries as of the close today. The wave structure hasn't broken down as anticipated in an aggressive manner, thus, caution is required until clarity on the wave structures is available. The use of channel lines provides guidance in the short term for potential upside stops.

For wave (ii), either it has completed and another subdivision is unfolding (in waves 'i' and 'ii') or a flat is occurring for wave (ii) which can see further upside to around the 4523 level. Once complete, a series of wave 2's would have completed and the XAO downside aggression should commence.

S&P500 ready for a break to the downside?

It is anticipated that the S&P500 is preparing for a break to the downside over the coming weeks as wave '3' gets underway. A down sloping channel in green provides strict guidance for the upside boundary - a confident break above the top channel line will indicate that the alternative count is most likely unfolding and bring scrutiny for wave 'B' circle.

For the primary count, Wave '2' is considered complete as a flat correction (evident for wave 2's), and thus, strict guidance on how the wave structure must unfold downwards must be observed. This means the index must unfold to the downside in a series of fives waves - aggressively. However, the short term shows some upside potential as the the first small five waves down appears complete.

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'. 

More sideways on the XAO?

The Australian All Ordinaries appears to still be unfolding sideways with wave (ii) of '3' and I suspect a small push upwards may be needed to complete (ii).

The real question is whether the Labor or Liberal party will win tomorrow's election.  The outcome will not affect the market, but there is a high possibility that Labor will retain leadership as the social mood in Australia is not at a extreme low to warrant a change of Government. Labor did undertake a dumping of prime minister Rudd to avoid losing on election day - a very good strategy in hindsight which seems to have brought stability to the party.

In bear markets, Governments typically aim for more control, grow much larger, budgets are wasted on stimulus (same as in 1929), new ways to collect more tax credits is sought and misleading the public to drive change are typical attributes. These can all be witnessed today in both sides of politics in Australia.

The worst possible outcome is to allow either party a majority in the senate. A Labor/Green alliance would give unprecedented control to the Government and Australia would see the introduction of aggressive 'green' laws, a Carbon Pollution Reduction Scheme and most likely a revisit of the Copenhagen treaty which is a demonstrated front for a World Government - The very attributes of control which occurs in recessions/depressions.

XAO Very Short Term Action

The very short term XAO wave count is at a critical point which could see the index roll over to the downside in the next couple of trading days.

Wave 2 Complete

In the last update, the XAO needed a little sideways action to complete a small wave '4' and then a push up to finish wave (c). This has occurred precisely as described and the expectation is for further declines. 

Since Wave '2' is now complete, the XAO must continue to lower levels with aggression for wave '3'. If this 'aggression' does not materialize, then this should be a warning for a period of uncertainty. A confident break below the end of wave (b) in less time than wave (c) took to develop will provide strong supportive evidence that wave '3' is underway.

 

XAO still Trending Sideways

In the last medium term post discussing  Wave 2, there was potential for further sideways action. I believe that this is currently the case and a set of very strict conditions has been imposed on the unfolding wave '2'. Under a flat correction, the final wave (c) must be a 5 wave thrust to complete the large wave '2' correction .

As the chart below is already two days old, there has been sideways action for the unfolding small wave '4' of wave (c). Once complete, another small push upwards is needed for wave '2' completion. If this count is flawed, then we'll know very quickly.

 

Head and Shoulders on the XAO (again)

The Australian All Ordinaries is displaying a major Head and Shoulders pattern, an ominous sign for the index. This pattern also helps to confirm the bearish Elliott Wave count discussed in previous posts.

Looking back at the 2007 top, it too displayed a down sloping Head and Shoulders pattern that was the commencement of the global financial crisis. The down sloping neckline usually indicates a very bearish stance, this same down sloping neckline (same exact slope) is visible once again right now on the XAO at a smaller degree of trend.

Being of a smaller degree, the expected declines on this current H&S pattern will initially be less that of the 2008 GFC and will form a wave '3' (as described here). However, it is anticipated that the declines will eventually exceed the bottom seen in 2009 and play out as described in this recent post.

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).