XAO Short term Update

Looking for confirmation of a 5 wave decline

The very short term XAO has completed a 3 wave decline and as described in the last post, a decline to around 4690 would most likely occur. The XAO hit 4695, before climbing up to 4726 today. The expectation is for more declines to complete wave '3' circle which doesn't appear complete. The MACD price oscillator (not shown) has plenty of room to move on the downside and no divergence is evident as yet.

Should the decline not occur, then channel lines (as shown) are needed to define the upside area that the XAO can be allows to operate within. As discussed in previous posts, breaking the upside channel line will bring into doubt the count as well as potential stops that could be used to reduce risk.

Australian Financial Sector - Long Term update

The Australian Financial Sector index - XFJ, has not declined in smooth waves of 5 from the all time high like the XAO. Instead, the XFJ has declined in waves of 3 and the decline has been difficult to predict due to a lack of 5 wave moves. However, if we were to use the same assumption as the long term XAO - a zig-zag correction down to the 100yr trend line, then we can assume (for the moment) that the XFJ will zig-zag lower but with a triangle for Wave 'B' circle.

Thus, the rules for a triangle need to be observed until proven wrong as shown below with expected paths for waves 'd' and 'e' labeled:

Short Term XAO update

The Australian All Ordinaries index appears to have completed a small flat correction for wave '2' circle as described in the last post and going against the decline in the US markets for the first 4hrs of trade.

The declines near the end of trade today are expected to continue down to around the 4690 level where wave '3' circle should terminate.

Ending Diagonal Complete - What Next?

The All Ordinaries is bouncing off channel support, but it appears a small 5 wave decline has been completed in order to get there. There is potential for one upwards push in the next couple of trading days to complete a flat correction for wave '2' circle (as shown) before further declines are expected to develop.

It should be noted from this post that a possible wave '2' top (from 2 high potentials) was expected at 4874 based on Fibonacci relationships of prior waves, the XAO pushed above this level by only 10 points before commencing the decline - showing Fibonacci provides some very useful "suggestions" for turns.

I also need to update my chart that shows the moon cycles compared with EW counts on the XAO - a post for later.

 

The case for Wave 2 completion

The XAO has declined after slightly exceeding the 76.8% retracement level and after completing an ending diagonal wave.

Discussed in the last post there was a distinct possibility that there would be a throw over of the 1-3 trend line in the ending diagonal on higher volume before declining.This has occurred, and signals an end of the current trend (at least in the short term).

The decline now needs to commence in 5 waves down thru the channel support lines (not shown) in order for a convincing start to wave '3'.

The pending RBA Interest Rate decision

It's that time again. Last month the RBA kept interest rates on "hold" even though there was a case to raise them based on the cash rate lagging the 90 day bill rate by almost 0.5%. Today, the 90 day bill rate hasn't much moved since the last RBA meeting and hence there is no case to adjust the Cash Rate Target.

As you can see in the chart below, there have been extended periods of time where the 90 day bill rate has remained range bound for up to 12 months at a time and the Cash Rate Target has remained unchanged during those periods too. This won't stop the MSM from squeezing out the usual hype on interest rates every month - instead of looking at the charts :-)

 

UPDATE:

The RBA increases rates today by 0.25%. The only logic in this decision was because the rise was delayed from last month due to the election - as a rate rise straight after the election would put undue pressure on the Government.

The RBA Cash Rate Target is now where it needs to be based on historic relationship with the 90 day bill rate as discussed in the previous RBA post.

Ending Diagonal Forming on the All Ordinaries?

Since mid September the XAO index has moved in waves of 3, which has provided difficulty in establishing a firm count over the short term. However, there is strong evidence that wave 'iv' is an expanding triangle and the move upwards since the 5th Oct is an ending diagonal. Ending Diagonals must have overlapping wave 2 and 4's, move in waves of 3 AND wave 3's must not be the shortest wave. Therefore wave '5' circle cannot be longer than wave '3' circle in the current scenario.

Wave '4' circle could still be developing (possibly as a triangle), however the upside target should still be  around 4800 or slightly higher, perhaps with a throw over on higher volume.

The MACD price oscillator still continues to be divergent against the XAO on the 60 minute and daily charts. (MACD will usually hit an extreme near the completion of wave 3's, or wave 3 or 3 etc, and be relatively consistent at different time scales).

The bigger picture is here

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.