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G4 Weekly Market Wrap, 11th December 2010

  • Written by Syndicated Publisher 317 Comments317 Comments Comments
    December 10, 2010

    I have been publishing this free market wrap for many years now and one of the discoveries that I have made is that in spite of every care taken to specify things as accurately as possible, human nature kicks in and people will read words through the ‘filters’ of their personal experiences and personality makeup. This is not anyone’s fault but rather the limitation of the written word in attempting to discuss a highly complex topic like the share market with a wide audience of investors ranging from very experienced technical analysts to every day Mum and Dad investors who may only have a very basic understanding of the market.

    The same word will have entirely different meanings to people coming from totally different backgrounds and life experiences. What is clear is that the ability to communicate accurately amongst humans is to a large degree dependent on the experiences that people have in ‘common’. Variations in interpretations occur depending on the experiences that they ‘do not have in common’.

    I have said to many people privately that the best communications take place when people are ‘face to face’ because then the communications can take place in a targeted  way formatted towards the known experience of the individual being spoken to.  Also through the normal feedback mechanisms inherent in ‘face to face’ communications any miscommunication can be easily seen and corrected on the spot.

    One example of this miscommunication has recently occurred in a share market forum that I sometimes take part in.  The word that has caused a bit of confusion is the word ‘rally’.  The word ‘rally’ brings up totally different pictures in the mind of people coming from widely different back grounds.

    The context of the word ‘rally’ as used in this market wrap simply states that the market will be trending upward during the specified time period discussed. It is as simple as that. It in no way suggests the ‘rate of increase’ in the price action during any period of time although there will be times when I suggest potential price targets.

    Since the beginning of the April correction that has taken place in both the US and Australian markets G4 has said that this correction was not the start of a multi month (or year) downward plunge of the market but rather a correction within the multi-month rally that started in March 2009.  We have always stated that the market would eventually move to price levels above those attained in April 2010 before completing what we call Primary wave Circle B as detailed in previous market wraps.

    There has never at any time been any suggestion that an improvement in fundamentals was driving the ongoing March 2009 rally. In fact, I have always stated that the rally was basically ignoring the extremely dangerous fundamentals that were brewing beneath the current ‘Alice in Wonderland’ rally in the market.  It is the reason why it is my view that once Primary wave Circle B completes sometime in the first half of 2011 that the next cycle will be quite a negative cycle for the following couple of years.

    One of the important things to be aware of is that there is huge volatility in the market at this time as investors oscillate between the strong emotions of fear and greed.  This in itself is an indication of the final stages of a rally (upward trend) and causes a pattern known in Elliott Wave terminology as an Ending Diagonal.  The following diagram shows you the idealized pattern that can be expected during this part of the cycle.  What is clear from the pattern is that it is not a strongly moving rallying pattern.  This is very much in keeping with what is happening during this ‘rally’ phase of the market cycle.  Whilst it is not the sort of ‘rally’ that some people had in mind when I originally spoke of a rally it is definitely the one that I had in mind.

    I would also like to briefly touch upon the limitation of all forms of analysis of the share market.  Let me clearly state that there is no methodology, that I am aware of, that can accurately predict the market direction 100% of the time.  It is the role of technical analysts to use various methodologies to determine the highest probability scenario that may take place in the short/medium and longer term future.  On most occasions the different methodologies will give contradictory signals and it is up to the analyst to make a judgment call on which methodology or group of methodologies has the greatest chance of being correct.

    A good example of this is the 25 day Conti cycle that I introduced readers to in my last market wrap.  This cycle indicated that the current short term market rally would form a top on the 10th December +/- 3 days.  Last week there were other indicators that were suggesting that the market would top earlier which is why in last week’s market wrap I mentioned in the Summary section that next week could have a negative tendency.

    As it turned out, the Conti cycle has so far proven to be the more important indicator. The lead from Wall Street last night would suggest that Friday’s high for the XJO is likely to be taken out so if the cycle is correct we should top out sometime between Monday and Wednesday.

    US MARKET

    The following chart is an update of the chart provided in last week’s market wrap.  I have made a slight alternation in the convention used in labeling the current lower level wave Circle i.  The labeling now conforms with the convention used by Prechter in Prechter’s book “Elliott Wave Principle”.  I have also nominated the names given to the various levels shown in the chart.

    Last night the S&P500 peaked at 1240.4 which was in fact the high for the trading day.  It fell just short of a Fibonacci level at 1240.68.  It is unclear at this stage whether we have completed Minute level wave Circle i yet but it must be getting pretty close.  The next Fibonacci level to be tested is 1248.34.

    I would anticipate that once wave Circle ii commences that we may visit the MBB currently located at the 1204 level.

    As can be seen from the above chart, the index is once again at the upper boundary of the Bollinger Bands located at 1243 and the W%R indicator is in short term overbought territory.  We have seen from past charts however, these bands do have a habit of changing shape within a very short period of time which is why they are only guides to potential levels that may be reached in the short term.

    The following chart is the monthly chart for the S&P500 showing the influence of the Saturn planetary lines on that index. We can clearly see from this that we are approaching some pretty stiff overhead resistance for the index at this stage.  Randall (our Astro Chartist) often provides detailed close up versions of the weekly price targets for both the US and Australian markets in the Astrology and Stock Markets thread at the following link:  http://forum.incrediblecharts.com/messages/427230/2618643.html

    It is interesting to note that the 1204 level where the MBB currently sits in my previous EW count chart of the S&P500 also coincides with a support line provided by one of the Saturn lines in the chart above.

    AUSTRALIAN MARKET

    The lead from Wall Street last night currently has the ASX200 futures contract anticipating a positive move of 12 points on Monday’s opening.  The ADRs on the NYSE has BHP up 0.23%, RIO up 0.77% and WBC up 2.02% so it certainly looks like yesterday’s  high of  4750 will be taken out on Monday morning.

    With a close of 4745.9 and an anticipated move of 12 points on the open we could expect the index to get to the 4757.9 level quickly on Monday morning.  We can see from the following chart that the UBB is currently sitting at 4761 so the target level appears to be quite a reasonable estimation of where the index is headed.

    Once the current short term rally move is over, the MBB level at 4653 is a good candidate for a support level for any short term retrace.

    The following Astro chart for the XJO provides some potential target levels for any rallies and support for any pull backs in the coming days.  Note that the 4656 level is very close to the MBB 4653 level previously mentioned.

    In last weekend’s market wrap I pointed out a potential short term Conti cycle which could top out sometime near the 10th December.  Once this cycle completes we can then look at the next potential top for the following short term rally in the XJO. We can see from the following chart that there is a 38 day Conti cycle that is pointing to a possible top around the 29th December.

    If these Conti cycles are correct, it would indicate that any interim top that occurs in the next 3 trading days will be followed by a retracement that should only last a relatively short period of time.  This is consistent with the typical wave 2 retracement (remember we are expecting a wave Circle ii retracement) which is often ‘sharp and quick’.

    Materials Sector (XMJ)

    In last weekend’s Market Wrap I commented that the XMJ was coming up against some overhead resistance.

    We can see from the following chart that the sector managed to break through this overhead resistance and for the time being it has become support.  With the W%R14 indicator in short term overbought territory it remains to be seen if it can remain above this channel line in the coming days.

    Financials excl. LPTs Sector (XXJ)

    When comparing the following chart of the XXJ with the one posted in last weekend’s Market Wrap we can see that the index has progressed in its rally towards the upper boundary of the expanding wedge pattern shown by the red lines.

    The sector has now reached a short term overbought level as indicated by the W%R14 indicator and is therefore likely to have a retrace in the coming days to relieve the pressure.

    Summary

    The S&P500 continues to show strength in its current Minute wave Circle i however all good things eventually come to an end and it will need to relieve some of the short term ‘overbought’ indicator pressures that are appearing in the charts. Exactly when this will occur is in the lap of the Gods but it is certainly due soon based on a number of methodologies.  I would anticipate this retracement to be reasonably swift and quite possibly ‘sharp’ in terms of a price action pattern.

    Any retrace in the American market would (if history repeats) be a strong influence on the Australian market.

    In spite of any short term weakness however I am still bullish as we head towards the end of the year.

    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 below:

    http://forum.incrediblecharts.com/messages/427230/2591748.html

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