XAO Multi-Year Outlook

The overall outlook on the XAO is extremely bearish based on Elliott Wave analysis (in addition to the massive problems globally with debt that ain't going away anytime soon).

The view below builds on a much larger outlook here that simply implies that XAO needs to return to the long term trendline  - some would call this GFC II or a double dip recession. Obviously there are other possible scenarios that may play out - but at the moment there is enough evidence in the elliott wave count to suggest a large correction of some form is occurring (I'm assuming a simple zig-zag correction based on an initial 5 wave decline).

A suggested target for the upwards 'B' wave circle at 5325 based on a Fibonacci ratio to keep the index under 61.8% retrace (5416). Driving above 5416 would have me reconsider the count as a 'B' wave in a zig-zag should not typically retrace more than 61.8% of the 'A' wave.

This top would complete around the start of August, hmmm, I wonder if that's when the 787 dreamliner will be released?

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.

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'. 

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).