Wave 2 regains some momentum

In the last chart,  there was a real possibility that a top was at hand for wave '2', however, we have seen a new short term high on the index that invalidates the short term count.

What one hopes to see after the top is at hand is:  1) fives waves down, and 2) a break of the 'ii-iv' trend line in less time that wave 'v' took to form. It appeared a very small five wave decline had commenced at the green dot in the chart below, but it failed to break the light green trend line (the previous 'ii-iv' line) quickly enough -  taking twice as long as wave 'v' before a break eventuated. This condition provides a warning that  wave 'iv' may not have completed.

With the long drawn out sideways action on the XAO, consistently moving in waves of 3, it is very likely that a larger triangle has been forming as shown below. It's unclear how much further wave 'v' has to go depending on how you count the internal subdivisions, but I suspect further upside is needed perhaps to the 76% retrace.

The new "ii-iv" trend line is now drawn - same rules apply.

Wave 2 update

A short update: It appears that wave '2' may have ended yesterday with the XAO failing to drive higher today. For confirmation, the index will need to drop thru the trend lines discussed in yesterdays post in sets of 5 waves down.

XAO topping

The All Ordinaries index appears to be in the final stages of the topping process. In the chart below two triangles at different degrees are evident and will complete wave (c) of '2'.

The index hit a key target today @ 4773 described in the last post and declined for the rest of the day, but I suspect there is still further upside to go as the decline does not appear to be a 5 wave move right now.

In support of the wave 2 topping, two triangles are evident on the short term count and indicate an upcoming trend change. The first triangle is an expanding triangle for wave 'iv' and the second is a smaller triangle wave '4' circle, both are indicating a upcoming change in trend of a higher degree. Thus, it is anticipated that wave '2' will come to an end in as little as a few trading days or into the early part of next week.

Breaks of the short term wave 2-4 circle trend line and the slightly longer term wave ii-iv trend line will be key indicators that will signal a potential major change in trend. 

Possible target area:

• at 4816, wave '5' circle will be equal to wave '1' circle.

XAO - Wave 2 pushing higher

The previous count for wave '2' has been invalidated as the XAO hit a new high today and casts significant doubt over a double flat correction. An alternative count below shows wave '2' still unfolding but as a single flat correction.

One deciding factor is interpreting wave 'i' of (c) - it could be counted as 3 or 5 waves. Counted as 5, it provides the first leg of wave (c) up. The minor issue in this count is wave 'ii' and 'iv' of wave (c) overlap ever so slightly - sometimes due to opening and closing extremes on the all ordinaries index.

Some upside targets for wave (c):

• At 4775 = 38.2% of wave i of (c) 
• At 4874 = 61.8% of wave i of (c)

Wave (c) could possibly be complete as of today due to the new high, but a break below the wave ii and iv trend line (not shown) will need to occur before we can consider 5 waves up complete.

It's also interesting to note the RBA left interest rates on hold this month - politics at play for the new Government? Further upside on the 90 day rate will force the RBA to reconsider the cash rate target at the next monthly meeting.

Interest Rates - How the RBA doesn't influence the cash rates

It'll soon be that time again, and the usual hype around where interest rates are going will be in the MSM. For anyone who takes the time, they can download the Historic rate data from the RBA web site and determine for themselves where the RBA cash rate target is most likely heading. Have you ever wondered why the MSM don't publish comparison charts (like the one below) prior to the RBA interest rate decision? Simple: The media hype it up every month - hype and fear sells news, in addition nobody in the MSM wants to undermine the RBA.

The RBA insists that it influences the cash rate in the market, but I contend that it is the market that sets the interest rates and the RBA simply follows the trend (as best they can). Some folks even believe that the market "anticipates" the RBA rises in advance and hence that is why the target cash rate and 90 day bank bills are tied closely together. Gees, I'd like to know who these rate experts are and how they are almost 100% correct each and every time and what their predictions are for the next 12 months. Maybe they should swap jobs and predict stocks each day.

Seriously, a cursory look at the rate charts prior to a RBA rate "decision" will provide a good glimpse into what is the most likely outcome. As of the 29th Sept, the difference between the cash rate target and 90 Day bill rate is almost +0.5%. It's highly probable that the cash rate target will rise by 0.25% (unless politics gets in the way soon after the election). The average difference between these two rates over the long term is +0.1% and over the previous quarter is +0.3%. Since there is almost a 0.5% difference at the moment, then rationale suggests that a 0.25% rate increase is likely.



The daily chart below shows the RBA cash rate target lagging the 90 day bank bill rate.

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.

Wave 2 near 61.8% Retracement

Wave '2' has almost reached  the 61.8% retrace level and wave (c) appears to be at an end or very close depending on how the subdivisions are counted.

Also, on XAO volume  (not shown below), since the 16th of Sept the volume on the XAO has fallen to very low levels. Changes in volume do occur near the start/end of waves and can help identify changes in trend and is most accurately viewed on the daily charts.

All Ordinaries near critical juncture

The XAO has continued to stay within the up-sloping channel for wave (c) and there is potential for the XAO to continue higher under the wave count shown below.

Wave '2" details
The first chart shows the bigger picture with the 2nd flat reaching a critical point - it is at the top of the overall wave '2' channel and I suspect it will have enough momentum to break through and cotinue higher to near the 61.8% retrace at 4723. At this level, wave (c) will also reach the top of the green channel that represents the typical boundaries of a flat correction - in this case the 2nd flat.

Wave (c) details.
The detail count of wave (c) is shown below and indicates there is still a need to push higher before the final 5th wave (which is sub-dividing) completes.

XAO Wave 2 of 'C' Circle - Updated

In the last post, I discussed a break above 4620 would invalidate the current count - slightly. The break to 4628, a mere 8 points and the upwards thrust that appears to be 5 waves (wave (c) ) provides additional insight for wave '2'. Basically, wave '2' is still unfolding - but as a double flat correction as shown below.

There is still room to move on the upside as it appears that wave (c) isn't quite complete. For completion, a small drop today then a push higher would finish this wave over the next several days.  A target area of around 4640-50 would be ideal and form a double top from June. Breaking confidently down thru the up-trending channel lines (shown) for wave (c) before heading higher(<--correction) could be a strong indication that wave (c) is already complete.

The overall XAO view can be found here for wave 'C' circle

XAO must stay under 4620

The All Ordinaries index must stay below 4620 for the current wave count to be valid. A break above this level will either:

• indicate further wave '2' action, or
• indicate that wave 'B' circle is yet to finish and will break higher again. If the index continues higher from here, then the correction that started in mid-april may be considered a triangle - indicating an upcoming change in trend in the medium term.

On the very short term,  it appears an ending diagonal could be under development since last Wednesday and one more small 3 wave push upwards is needed to finish this leg.  For the ending diagonal to remain valid, the index cannot climb above 4605 (wave 3's cannot be the shortest waves). On the technical front, the RSI and MACD price oscillator are in oversold territories indicating a short term correction or change in trend may be at hand. Will the Luna half moon from last Thursday still have a say in the short term? It still has another day or two to prove itself.

Luna Lunacy on the XAO

Yes Yes, I know what you're thinking, but you see, I just have to know....

...and the correlation between lunar cycles seems uncanny with the short term changes in trend with the XAO by + 1 day. The key signal appears to be the half moon cycles that represent a greater share of the trend changes than any other luna phase.

Yesterday, I discussed the very real possibility of the XAO climbing to complete a 5 wave move to complete wave (ii) as a flat. This is occurring today and thus, a change in trend may indeed be at hand and will tie nicely with the half moon phase tomorrow.

It'll be interesting to see how the half moon phase theory holds up over a longer time period. It'll also be interesting if specific moon phases favour any particular waves and degrees of trend.

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'.