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G4 Weekly Market Wrap 12th November 2010

  • Written by Syndicated Publisher 337 Comments337 Comments Comments
    November 13, 2010

    The Bigger Picture

    As we have a few new readers of this market wrap I thought that it would be worthwhile briefly going over some things that we have written about in previous market wraps so that the current market wrap can be read in context. The 2007/2008 period saw our market and that of the US plummet reflecting the impact of the GFC. In March 2009 markets commenced a strong rally which had many pundits believing that ‘the worst was behind us and that we were starting a new bull market’.  In April investors had a ‘wake up call’ suggesting that perhaps things were not quite as rosy as first anticipated when the markets once again started reflecting some negativity. Currently we can see a great deal of uncertainty in the market and it’s worth while looking at the bigger picture.

    Technical analysts are students of history in particular when attempting to recognize patterns. As most readers of this market wrap will be familiar with Elliott Wave principles I will simply state that the GFC is a Cycle level corrective wave 4 which will last until possibly 2013. Whether the corrective pattern will turn out to be a 3 wave ABC move or a longer lasting 5 wave Triangle pattern is still to be determined.

    If we look at past market crashes, it can be seen that it is quite normal for a dramatic share market plunge to be followed by a strong rally culminating in a further dramatic fall in a third wave.

    One example is the 1929 crash of the DOW Jones index. Note the 50% decline followed by a retracement rally which recovered around 50% of the original plunge.  I have no doubt that during that rally there would have been market experts saying that ‘the worst is behind us’.  We can then see how dramatic the third wave in a corrective pattern can sometimes be.

    Another example is the bear market of the Nikkei in the 1990’s. This had a much longer lasting initial plunge which dropped around 63.5%.  After a plunge like that it is not surprising that the following rally only managed a retracement of around 38.2% of the initial plunge.  Now the pattern was obviously not identical to that of the DOW bear market but none the less the ABC pattern is rather obvious.

    My third example is the more recent 2000 crash in the NASDAQ.

    We can see from this example that as the initial plunge was only around 40%, the following rally recovered a greater portion of the initial fall.  Once again the retracement was close to a significant Fibonacci level.  In the current bear market the S&P500 has managed to retrace around 61.8% of the original plunge and the XJO around 50%. We can see from this the importance of Fibonacci levels in technical analysis.

    Whilst the third wave of the above bear markets went below the termination level of wave A, we cannot of course assume that a similar event will take place in this bear market. It will depend entirely on the resulting corrective pattern that unfolds.

    The Market Is Doing So Well , But Why Are We Feeling So Bad?

    I have no doubt that there would be many investors particularly in the US and Europe who would have thought the above.  The patterns in the market do not appear to reflect the underlying fundamentals of the global economies. The reason for this is the ‘measuring stick’ that is used particularly in the US.  All indices and commodities are priced in US dollars.  If we use a different measuring stick like a commodity that can be purchased with US dollars we get an entirely different picture.  The following chart of the DOW priced in ounces of gold (compliments of chartoftheday.com) gives us a truer picture of what is actually happening.

    We can clearly see that based on what you can buy with US dollars, the DOW actually peaked in 1999 (not 2007) and has since fallen around 82%!!!

    This probably more closely reflects the misery being experienced in different parts of the world .  One of the reasons for bringing up the relationship of the US dollar and the equities market is to highlight the importance of monitoring the US dollar closely in order to get some idea of what may happen in the US equities. It is obviously not the sole influence but it is a big one for determining what happens in US equities.


    As announced by Paul Thomason, G4 uses most of the more traditional technical analysis methodologies as well as some little known methodologies.  Our view is that in order to fully analyze the market we need to make an attempt to analyze not only price but time and pattern as well.  In order to accomplish this we also use Elliott Wave analysis (pattern), Fibonacci analysis (price and time), J M Hurst’s cycle analysis (time and pattern), what I call Astro chart analysis (price and time) as well as a number of other methodologies developed by our group.

    Hurst cycle analysis is based on the observation that the complex wave shape presented on a  share market chart is made up of hundreds (perhaps more) individual cycles that when combined form the final wave shape.  He discovered that there are some primary cycles that drive the general trend of the market and used this analysis to predict future market trends. For those wishing to further their knowledge on this methodology I can recommend reading the articles written by Jim Curry who uses this methodology to great effect.  His writings can be found at http://www.safehaven.com/author/297/jim-curry.

    What I call Astro charts are standard share market charts which have an overlay of various planetary lines on them.  These can be seen as having a similar effect to Fibonacci  levels in that they often provide strong support and resistance levels for price action. A typical example is the following weekly chart of the XJO.

    Planetary Line Legend:

    blue Saturn, grey Neptune, orange Uranus

    dotted = mirror

    After years of working with charts for various indices, our Astro analyst uses a fixed planetary template for helping determine weekly price ranges and targets. On the ASX200, for example, he relies on Saturn (blue), Neptune (grey) and Uranus (orange) price lines. While price bars will sometimes overshoot or undershoot, depending on other planetary lines affecting daily ranges, the weekly charts help determine targets for intermediate moves.

    The other methodology is our Fibonacci analysis. Many technical analysts would be aware that Fibonacci ratios work both at a price and time level.


    Most of our analysis of the American market is on the broader S&P500.  It has always been our contention that when the decline in April 2010 commenced it was not the start of a strong prolonged move down. We contend that the April decline was simply a shorter term correction of the rally that started in March 2009.  Once this correction completed it would continue to new highs.  The main reason for holding this view came from our Hurst methodology which indicated that a strong 4 year cycle was in play. This cycle bottomed in March 2009. It therefore will not top until sometime in the first half of 2011.  A rising cycle trend is obviously inconsistent with the view that the market could be significantly heading down during this period. Using the same logic this same 4 year cycle should bottom out sometime in 2013. Whether it will be the bottom of the GFC will depend entirely on the pattern that eventually plays out.

    The following chart (which is an update of the one provided in the last market wrap) shows our current preferred EW count for the S&P500. For the time being we are showing a 3 wave corrective pattern for the Cycle level wave 4.  This wave started with the 2007/2008 plunge forming Primary wave Circle A and the rally which started in March 2009 is forming Primary wave Circle B.

    Circle B appears to be forming as an ABC corrective pattern comprised of Intermediate level waves (A), (B) and (C).  Currently it looks like Minor wave 3 has just completed in Intermediate wave (C) and we have just started Minor wave 4.

    Note that this count will be invalidated if the decline moves into the price range of Minor wave 1 at 1129.24.

    As mentioned in last week’s market wrap based on EW guidelines of ‘alternation’ because Minor wave 2 was a ‘sharp’ pattern there is a 61.8% probability that the Minor wave 4 pattern will be a ‘flattish’ pattern.

    Our current cycle analysis points to a possible completion of this Minor wave 4 sometime between the 22nd and the end of November 2010.

    It is worth mentioning that based on our Hurst methodology, we expect Intermediate wave (C) and therefore Primary wave Circle B to complete sometime between February and June 2011.  On that basis the current rate of progress on completing the current 5 wave move at the Intermediate level could indicate one of the following:

    1) That the current 5 wave move is being labeled at the wrong level

    2) That wave 5 of the Intermediate level may extend into a 9 wave pattern

    We will have to wait to see how it pans out.


    With the lead from Wall Street last night the ASX200 futures is currently suggesting a fall of 19 points for our market open on Monday. On the NYSE BHP was down 3.14%, RIO was down 2.78% and WBC was down 1.77%.  Perhaps the discrepancy between what  the ASX200 futures is suggesting and what the ADRs are suggesting is that some of the falls in the ADRs already occurred in the XJO on Friday.

    For the same reasons as mentioned for the S&P500, G4 expect that the XJO will eventually peak sometime in the first half of 2011.  This is why we are currently only looking at bullish scenarios for the XJO.

    The EW counts for the XJO are more difficult than those for the S&P500 because of the overlapping nature of the rallies that have taken place.  For this reason we are looking a couple of possible scenarios for the XJO.  The first scenario is based on a couple of ‘nested’ 1/2 waves.  As indicated in the chart below the EW count is based on Minor waves ABC having already completed and thus also completing Intermediate wave (B).

    In this scenario Minuette wave (i) has completed and we are in the process of forming Minuette wave (ii).

    This scenario would be invalidated if Minuette wave (ii) terminated below Minute wave Circle ii.

    The second scenario suggests that Minor wave B has only recently completed and we are in the process of forming Minor wave C.  This scenario allows for a much deeper decline.

    The decline that started on the 5th November is expected to continue until between the 22nd and end of November.


    In our last weekend’s market wrap we suggested that the week would see the start of some real negativism in the market and that is exactly what transpired. There is nothing to suggest that the market will do anything other than to trend down next week as well.

    Join us daily at our Elliott Wave Watching thread and see what the EW enthusiasts are saying about the US and Australian markets. Simply click on the link here

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