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Weekly Market Wrap November 5th, 2010

  • Written by Syndicated Publisher 52 Comments52 Comments Comments
    November 10, 2010

    Chart Of The Week

    To provide some perspective to the current Dow rally that began nearly 20 months ago, all major market rallies of the last 110 years are plotted on today’s chart. Each dot represents a major stock market rally as measured by the Dow. As today’s chart illustrates, the Dow has begun a major rally 27 times over the past 110 years which equates to an average of one rally every four years. Also, most major rallies (73%) resulted in a gain of between 30% and 150% and lasted between 200 and 800 trading days — highlighted in today’s chart with a light blue shaded box. As it stands right now, the current Dow rally (hollow blue dot labeled you are here) is still somewhat short in duration and below average in magnitude when compared to all the stock market rallies that occurred since 1900. It is worth noting, however, that the current rally is in line with the more typical rallies (see light blue shaded box) of the past 110 years.

    Last night the S&P500 peaked at 1227.08 and finally closed at 1225.85.

    As indicated in my market wrap many months ago it was the view of the 4 Musketeers that the March 2009 rally was not yet completed and that the US and Australian markets would eventually come out of the April correction and form a new interim GFC market high sometime in the first half of 2011. So far this is exactly what is happening. The following higher level EW count is our scenario for the S&P500. It does appear as though we are in a 3rd wave at some level and that we are nearing completion of that wave. The 61.8% Fibonacci retracement level of the 2007/2008 plunge would seem to be a reasonable level at which to form a top for this third wave.

    It could of course move higher but I would be surprised if it didn’t hesitate before doing so.


    If we do commence our wave 4 then what is the likely decline and pattern that may develop? For the above EW count to remain valid, wave 4 cannot move below the termination level of wave 1 (which was 1129.24). To breach that level would require a retrace of over 8%.

    The other thing that we know from Elliott Wave guidelines (not rules) is that on 61.8% of occasions, there will be pattern alternation between waves 2 and 4. This means that because wave 2 was a ‘sharp’ pattern it means that the chances increase that wave 4 will have a ‘flat’ pattern. This in turn would suggest that wave 4 may be a Flat pattern (ie, waves a, b and c are of similar range) or it could turn out to be a complex pattern.

    This therefore increases the chances that the index may not fall dramatically but dither around in a sort of sideways moving channel.

    Putting it all together let’s make some assumptions.

    1). The retrace is not deep therefore we could assume either a 23.6% or a 32.8% retrace

    2). That wave 3 will terminate somewhere around the 1228.74 level for the reasons given previously

    The above assumptions would lead to a decline of around 44.63 and 72.24 (ie, between 4% and 7%) giving a target zone of between 1156.5 and 1184.11.

    Australian Market

    Due to the lead from Wall Street the ASX200 futures contract is currently suggesting a move up of 18 points on Monday morning. The ADRs on the NYSE have BHP up 1.16%, RIO up 0.4% and WBC down 1.4% so once again the upward momentum will come from the materials sector.

    We can see from the chart below however that it is really starting to look unsustainably over stretched. It is already above the UBB and is supposedly going to move up further on Monday. I would be very surprised if it doesn’t get dragged back into the Bollinger Band envelop in a dramatic way early next week.


    We can see from the chart below that the Financial excl. LPTs Sector is clearly dragging the chain. We have had a ‘sell’ signal generated from our W%R indicator which should ensure further weakness.


    Lunar Studies

    Randall and Barry undertook a very interesting study of lunar phases a few months ago and the effect that these have on the market cycle. There studies revealed some very exciting facts about these lunar phases.  For example the lunar 3rd quarter to New Moon period on average is a very positive period.  Our 3rd quarter to New Moon period of the 30th October to the 6th November just completed had our index up around 3.3% !!!

    What is important to know is that the New Moon to 1st quarter lunar period is on average a negative period. The New Moon to 1st quarter lunar period that we have just entered is from the 6th November to 14th November.

    Now if we combine Randall and Barry’s lunatic studies with the drag of the XXJ and the likelihood of the XMJ getting sucked back into the Bollinger Band envelop early next week, you may understand that I believe that the chances of the overall market having a positive week next week are very slim.

    A quick look at the daily XJO chart on the next page shows us that the index price action is currently above the UBB which is an unsustainable situation.  This is obviously due to the over extended position of the XMJ never the less I would expect this situation to be rectified early next week. We can also see this corrective tendency being displayed in the way that the W%R indicator is starting to roll over.

    Summary

    For the reasons given in this market wrap I do expect that next week will be the start of some negativism for the market cycle and would be very surprised if the US and Australian markets ended up having a positive week. I will be monitoring the market action very closely as I will be using this potential negativism as an opportunity to enter the market.

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