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G4 Weekly Market Wrap, 17th December 2010

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    December 18, 2010

    Hhmmmm.  The role of a technical analyst is similar to that of a forensic investigator.  You have to gather all the known facts and make an attempt to decipher what the clues are telling you.

    One of the difficulties that we face is that the market is not a static entity but rather continually changes its shape based on a huge number of opposing forces.

    As mentioned previously G4 attempts to gain an understanding of the market by studying various methodologies that focus on the key elements of price, time and pattern.  The time focused methodologies include the Hurst market cycle analysis and other cycle analysis methodologies including Fibonacci and Conti cycles.  Another important methodology that we use is called Delta.  The primary function of the Delta methodology is to determine high probability periods where tops and bottoms will take place in the market. It is based on the discovery that markets move in a specific sequence of tops and bottoms over a particular time frame.  That sequence of tops and bottoms repeats in similar time frames into the future. I cannot go into any detail into exactly how it works because it is a proprietary system.  For those interested they can find out more at the following website: http://www.wilder-concepts.com/

    I should also say that I do not have an affiliation with that company but have found the methodology extremely useful.

    The Delta methodology can determine time frames for potential tops and bottoms in stocks and markets that can sometimes be weeks, months or even years into the future. We have used this methodology with great success in the past for predicting tops and bottoms for both indices and stocks.  One of the ‘flies in the ointment’ in the methodology is that there are two periods within a cycle where the tops and bottoms sometimes ‘invert’.  When ‘inversions’ take place, the following cycle will now have tops where the previous cycle had bottoms and bottoms where the previous cycle had tops. Once the ‘inversion’ takes place the rest of the cycle will continue on its merry way and continue to produce the new set of tops and bottoms.

    The reason for mentioning this is that for months now I have been suggesting that we would probably be forming an interim market high at the end of December/early January.  It is now becoming highly likely that an inversion has taken place in the cycle which may cause the anticipated interim market high to become an interim market low.

    Now in the larger scheme of things, this does not change the fact that we still expect the rally that started out in March 2009 to top out in the first half of 2011. This is due to the topping out of the 4 year cycle discussed in previous Market Wrap documents. All that the inversion changes is the timing of some of the wave shapes that form the final pattern on the way up.

    What is clear from this possible inversion is that any retracement that takes place in the near future in both the S&P500 and XJO, should be over by the end of December /early January.  I mention this specifically because many EW analysts are suggesting the possibility that any top that is currently underway may actually be the Primary wave Circle B top that will bring an end to the March 2009 rally.  It is our view that this will not be the case and that any retracement will only be a correction within a continuing rally. It is quite possible that the upcoming retracement may be sharp and savage which may give the appearance of the beginnings of a much larger decline but we continue to believe that the March 2009 rally will not have come to an end.

    There will be some analysts who are wondering why the S&P500 has continued to rise in the face of most indicators showing divergences. Stocktiming.com has provided a very good chart explaining the reason for this phenomenon.

    They make the following incisive comment about what is happening:

    It is the “net amount of inflowing Liquidity” coming into the market every day.   “Net amount of Liquidity” is the amount of Liquidity coming in or leaving the market after all the selling has been absorbed … or not absorbed.

    Since September, the net inflowing Liquidity has been in Expansion territory and in an up trend.   Inflowing Liquidity is the unseen force in the market that confounds many, and subverts the power of negative divergences as well as many commonly used technical indicators.

    It isn’t until Liquidity levels pull back in the face of lingering negative divergences, that a market pull back or correction finally occurs.  When inflowing Liquidity is in Expansion territory and at a high rate of expansion, the market continues to move up in spite of any negative divergences.”

    What should be noticed from the above chart however is that there has been a ceiling put in place on this liquidity expansion that looks vulnerable at this point in time.

    US MARKET

    On the Elliott Wave Watching thread in recent times we have been discussing the possibility that the cycle inversion that has taken place may mean that our previous EW count for the S&P500 could be incorrect.  Readers may recall that my preferred EW count for the S&P500 had us currently forming Minute wave Circle i in Minor wave 5.

    On that basis we would expect any retracement to be Minute wave Circle ii as the next part of the pattern to develop.  Based on the following chart of this proposed scenario I would expect Minute wave Circle ii to possibly move down towards the MBB at around the 1217 level.  We can see from the chart that the 1200 level is also a level that is providing some reasonable support for a possible bounce as well.

    Other possible EW counts for S&P500

    Whilst the above EW count is still completely valid, it pays to keep in mind a couple of other possibilities for the time being.  The other possibilities are provided on the second chart.  These scenarios look at the possibility that we have not completed Minor wave 4 of the pattern.  Whilst there are many other possibilities, I have tabled two of these other possibilities.  The first is that we are in the process of  forming a Flat pattern and the other scenario is that we are forming a Triangle pattern to complete wave 4.

    It should be noted that the higher the current rally goes, the less likely that these two scenarios are in play because the top of the pattern is above the termination level of wave 3.  At this stage however they are still both valid scenarios.

    Note that the last two scenarios are in keeping with the channeling properties often exhibited by impulsive patterns.

    We can see from the previous charts that the UBB is located at the 1260 level so a spike up to that level is still a possibility.  Looking at the 50 minute chart below we can see that there is some very strong overhead resistance between the 1241 and 1243 levels that has stopped the index on a ‘close’ price basis for the last 5 trading days.

    The W%R14 indicator is also showing a potential short term sell signal. It remains to be seen whether the index will channel between the UBB (1247) and LBB (1235) for a little while longer before a breakout occurs.

    In the last 5 trading days the S&P500 has peaked at 1246.73, 1246.59, 1244.25, 1243.75 and 1245.81.  It is very obvious that the current level is providing a very strong resistance to any further advancement in the index.  As it is common for clusters of small bodied candle sticks to form at interim market tops it would not surprise me at all if we did start a decline early next week.

    AUSTRALIAN MARKET

    With the weak lead from Wall Street the ASX200 futures contract suggests a positive move of 8 points on Monday’s open.  I personally find that hard to believe as the ADRs on the NYSE have BHP down 0.59%, RIO down 0.64% and WBC up 0.27%. If the market is going to open up in the positive on Monday it’s difficult to see where the positivity will come from.

    Whilst the US market and many of the other global markets have exceeded their April highs, the Australian market has performed like a wet rag in comparison.  We can see that it has not even achieved a retracement to the 78.6% Fibonacci level at this stage.

    We can also see in the chart below that we have channels within channels and at present we have run into an overhead descending red trend line that promises to push the index down towards the 4650 level

    We can see from the Astro chart below that this coincides with the 4640~4660 Saturn lines.

    The chart below also points to support at around the 4700 level and the MBB is currently sitting at 4680 so everything points to support all the way down to around the 4600 level with intraday spikes down to the 4550 level.

    The W%R14 indicator is also showing a topping formation so as with the S&P500 it would not surprise me to see the market start to decline in the coming week.

    Materials Sector (XMJ)

    Whilst the XJO did not exceed its April 2010 high, the XMJ certainly did with great gusto. The following chart clearly indicates that its rate of ascent accelerated in the period from August 2010 to the current period.  Note that we had a similar rise in the sector in September 2010 to the rise we’ve just recently experienced.   After that rise there was a period of consolidation (refer encircled section on chart) before continuing on with the rise.

    Based on some of the technical indicators (not shown on chart) it is likely that we will not get a similar result this time but may get a deeper retracement to perhaps the lower boundary of the channel or if the down turn is more severe then it may even go down to the April high around the 13300 level.

    Financials excl. Property Sector (XXJ)

    Whilst not the only drag on the overall market, the XXJ certainly has not contributed to any overall market rally.

    The XXJ has been contained within a sideways moving channel with the only slightly positive sign being that it has been making higher lows.  The W%R14 indicator is providing a good indication that we may be about to enter into a decline.

    Summary

    The US market has continued its relentless move upwards but is showing clear signs of having met a potential ceiling at the current price levels.  Whilst a spike through to the 1260 level is entirely possible, it is my view that the current rise in the market is due for a retracement.

    The XJO in spite of a lot of encouragement from the US market has not been able to equal the interim top achieved on the 5th November 2010 at 4815 and it is definitely showing signs of an impending decline.

    So whilst the markets continue to surprise to the upside, I strongly suspect that we will be lower by next week end than where we currently find ourselves.

    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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