September Market Update

The latest September Market update has been published on the ASF here

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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).

XAO - Still declining from a short term top

The XAO is still declining and the next several days will help determine what wave structure unfolds. Ideally, the wave count shown should unfold and provide a short term bounce.

However, I'm also half expecting this leg to sub-divide further and potentially drive thru the 3700 support (also 38.2% retracement of wave 'C'). If so, then I would be tempted to label this leg down as wave 'a' circle once this leg completes. Under this scenario, 3500 would be a potential target area for a bounce.

Overall, the key is to see a 5 wave decline from the end of wave 'C' in order to expect a short term bounce upwards.

Australian Resource Sector (XMJ)

The XMJ has been correcting since November last year and has unfolded as a Double zig-zag correction (so far) for either the (A) wave of a much larger correction or 'B' circle wave to complete the correction.

The first chart here, was posted on ASF back in April and provided two likely wave structures for the XMJ: Either wave (A) had completed and the index was heading lower or another push up to complete a more complex correction (double zig-zag) was needed.

The double zig-zag played out and took the index higher, which has now topped mid-June at around 11200. So the question now is: Will the index complete wave (B) lower and fulfill a long term flat correction that effectively sees the index playing out sideways for many months? Or will the index head lower and commence the next 5 waves down? In any event, it is extremely likely that a significant down leg is now unfolding.


Considering that the current count on the XAO is calling for an expanded triangle, I'm giving the odds in favour of a flat on the XMJ. Hence, wave (B) and (C) need to play out. The second chart here from 17th June, outlines the preferred wave count. This may mean that the XMJ won't see a new low (perhaps Double bottom, or close to) until wave 'B' circle completes.

XAO Medium Term Outlook

I thought I would provide some context to the shorter term charts, so you'll find the XAO medium term outlook for the current wave count shown on the left.

I took a look back at some medium term charts from last year that contained estimations based on Fibonacci relationship and an assumed 5 wave decline from the 2007 top.

So far, the XAO has approximately followed the estimations with the exception of the current expanding wave (4) triangle that will take some time to unfold. I had assumed that a contracting triangle would unfold in the wave (4) position and didn't expect an expanding triangle as they seem quite rare on the XAO.

I haven't taken a close look at the time relationships between the waves as yet, something I'll do shortly.

Wave (5), (not shown) may result in a 5th wave failure because of the expanding triangle - hence there is a high probability that there will be sideways action for quite some time (eg trading in a 800+ point range)

XAO Wave 'D' down underway

Recession fears cripple stocks
That was the headline on CNN Money this morning, I thought we were already in a recession/depression/major correction/or something - when you can't pin the market action on an event - make up a headline, a usual Media tactic.

Another way to interpret the recent down leg is that wave D of an expanding triangle is now underway on the XAO.

The 4070 mark was hit and exceeded last week topping at 4079 or almost spot on 61.8% of the previous 'a' circle leg. The 4079 level should not be broken in the expanding triangle scenario - if it is, then something much more complex is unfolding. The wave structure from the recent top is moving in 5 waves down, so there is supporting evidence that more downside is to follow. This supports the probability that wave 'D' down is underway.

A rough short term wave structure is provided that suggests a retracement is needed soon before wave (iii) takes hold for more aggressive downside (should this short term wave structure unfold, then technically a head and shoulders pattern would unfold).

Wave 'D' should head to new lows (possibly to 2700-2800 on the XAO) before wave 'E' upwards kicks in.

XAO Wave 'C' at a top?

Wave C in the longer term Expanding Triangle scenario may have topped today, with the final wave 'v' looking complete and being approx 61.8% of wave 'i'.

There is potential for a little more upside, but looking purely at the probabilities and the XAO's love of 61.8% fib ratios between waves moving in the same direction - extreme caution on long positions is now warranted.

There is also a close fib ratio between this final leg and the previous 'a' circle leg as well - wave 'c' circle being almost 61.8% of 'a' circle. Breaking below the bottom of wave 'iv' and then wave 'b' circle should signal the next down leg (pending the analysis of the unfolding wave structure of course).

XAO - Expanding Triangle for Wave (4)

Wave 'C' Not yet completed. Under the Expanded Triangle scenario, Wave C has continued to new short term highs but has provided more clues to it’s structure – namely 4 small waves up ‘i-iv’ have completed (wave iv may still have one more leg to complete). The wave ‘b’ circle has unfolded as a triangle, but an additional triangle unfolded within this correction to add complexity in calculating it's ending point.







Short Term. Five waves up on the last leg of wave C should complete very shortly and provide a turning point just above the 4000 mark (to around 4070). Wave ‘iv’ may not yet be complete, therefore some minor downside could unfold before heading higher to complete 5 waves up.



Overall Wave (4) target. It should be noted that wave 4’s tend to retrace 38.2% of wave 3’s – this would put a completed wave 4 retracement at around the 4300 mark on the XAO. Therefore a drop into wave D down (to a new low) and then back up into wave E at around 4300 would be a reasonable estimation for a completed expanded triangle scenario. Wave (5) down would then commence.

XAO - Expanding Triangle for Wave (4)

XAO - Expanding Triangle for Wave (4)

The Wave 'C' up leg in the Expanding Triangle Scenario for the XAO could well be complete (or very near completion with an additional sub-divison that takes the XAO above 3950).

The 3950 target was almost reached today and is a site of solid resistance and does provide a suitable area for a turn down into the wave 'D' leg of the Expanding Triangle.

Timewise there is relationships between the two upward sub-divisons of wave 'C'. The 'a' circle leg and the 'c' circle leg (not labelled) - the 'c' leg is 63% of 'a' - a very close 61.8% fibonacci relationship of time.

I've also include the MACD signal line, a short term high representing the end of wave 'iii' shown with the dashed line, and the subsequent divergence of the MACD as price hits a new short term high (representing wave 'v').

XAO Next Steps

Prices need to turn down from here (or perhaps after one more small push upwards) for the Expanding Triangle to continue to be a top contender. Five small waves down and a break of the short term trendline will be an indicator that suggests a turn has started.

Looking at the wave structure since the 21st Nov, I'm finding it hard to see other wave scenarios under the current long term count. A triangle is highly probable for wave 4's, in this case it would need to be an expanding one.