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G4 Weekly Market Wrap – December 3rd, 2010.

  • Written by Syndicated Publisher 36 Comments36 Comments Comments
    December 3, 2010

    In last weekend’s market wrap I suggested that in spite of all of the negativity in the market it was our view that the current correction was coming to an end and that we would see the beginnings of a rally.  This is exactly what transpired.

    FIXED TIME CYCLES

    G4 uses a number of different time cycle methodologies in an attempt to come up with the highest probability scenarios for future market action.  These include both fixed time and dynamic time cycle methodologies.

    Amongst the fixed time cycle methodologies analysts use a number of well known periods such as 30, 45, 60, 90, 120, 135, 144, etc cycle periods.  There is another type of fixed time cycle that occur known as Conti cycles.  These have a habit of appearing for very short periods of time and then disappearing only to re-appear with a different cycle period.  A perfect example of these in action is seen in the following chart of the XJO below.

    Note that the nature of the Conti cycle is that you will get either a direct or inverted cycle followed by its opposite number.  The chart below shows an inverted 35 trading day cycle followed by an inverted 36 trading day cycle.  Note that there can be variations of +/- 3 days between each pair.  We also show a 64/65 day pair and a smaller 25 day Conti cycle that may be forming.  If it is a true Conti cycle then the chances are that we will get an interim top around the 10th December +/- 3 days.

    I have also shown a strong 144 trading day cycle period extending between the 15th April and the 5th November peaks. As with everything else in technical analysis, nothing is set in concrete but rather point to higher than normal probability events that may occur. It is the role of the technical analyst to attempt to decipher the ‘clues’ that the market presents from time to time.

    US MARKET

    In last weekend’s market wrap we suggested two possible scenarios for the S&P500.  We commented as follows:

    “So we are at a cross roads. Our cycle analysis indicates that we should be seeing a rally beginning in the next few days but the pattern for wave 4 has an appearance of incompleteness about it.”

    For those who do follow the Elliott Wave Watching thread link, shown at the end of the Market Wrap will know that on Wednesday I posted the chart below and made the following comments:

    3) and to top it off I thought that the following chart of the S&P500 clearly shows that the current levels are acting as a very strong support level at this point in time. I don’t know how many more tests to the downside the bears will pull before they give up in disgust.

    That afternoon I posted the following comment:

    “It would not surprise me in the least if the mood change that I talked about in my weekend market wrap started tomorrow.

    Santa is in the midst of packing his sleigh.”

    Right on schedule the following day the S&P500 closed up 2.16%

    At this stage of the pattern it does look like the S&P500 is in the final stages of completing Minuette wave (i).  Looking at the UBB on the chart below this wave could terminate near the 1233 level on Monday.

    Note that once Minuette wave (i) does complete, Minuette wave (ii) could easily give up 50% to 78.6% of the range of wave (i).  The nature of wave 2’s at any level is that they can often take back most of the profits gained in wave 1’s.  Note the retracement of Minor wave 2 below as a percentage of Minor wave 1.

    G4 has been saying since April 2010 that we anticipated that the rally that started in March 2009 would peak in Intermediate wave (C) and Primary wave Circle B in the first half of 2011.  It is likely to do this around February 2011 and as late as June 2011.  At this stage I currently favour the earlier date but we will be able to tune in more accurately as the pattern evolves.

    Now for those who may be wondering at which level the S&P500 could possibly peak for the time being we can use the concept of wave equality between waves 1 and 5.

    Wave 1 range was 1229.24 – 1010.91 = 118.33

    Low of wave 4 was 1173 therefore wave 5 could peak at 1291.33 (1173 + 118.33).

    Naturally enough if it isn’t wave equality then the normal intermediate Fibonacci ratios would apply.  Also the range for the 5th leg could also be taken from 1187.4 instead of 1173 as that was the low before the 5th wave rally leg commenced. That would put wave equality at 1187.4 + 118.33 = 1305.73. So summarizing, using wave equality between waves 1 and 5 we would be looking at a potential peak in 2011 of between 1291.33 and 1305.73.

    AUSTRALIAN MARKET

    With the S&P500 closing 3.18 points up (+0.26%) the ASX200 futures contract currently anticipates a slightly positive move on Monday of 4 points.  The ADRs on the NYSE have BHP up 0.64%, WBC up 0.84% and RIO up 1.65% so everything does point to a positive start on Monday for the XJO even if it may be a little subdued.

    The above chart of the XJO just shows the stark difference between the nature of its rally compared to that of the S&P500.  Whilst the S&P500’s rally is clearly impulsive, that of the XJO is a creeping type of rally.  It does remain in an ascending channel but its waves are overlapping.  Yesterday it met overhead resistance (see red dashed line) and the UBB has turned down.  That signal, coupled with the W%R indicator above the -20 level is clearly showing that the index is running out of momentum at this stage.

    Based on close prices, the XJO appears to be trapped in a sideways moving channel between 4580 and 4710.  It needs to break out of that channel on a close price basis in order to make further progress.

    The Astro chart below shows us that the weekly XJO chart had the price action straddling the crossing Saturn lines.  It is possible that the cross over level at 4651 may act as short term support for Monday.  A look at the previous daily chart of the XJO shows some support at that level.

    What is not shown on the above chart is a descending Sun/Earth price line that stopped the progress of the move up yesterday.  Unfortunately the particular chart that does show this planetary line has a black background and would use up a lot of ink for readers who print out this market wrap each week.  Randall our Astro guy will post the chart on the “Astrology and Stock Markets” thread at the following link sometime this week end for those interested:

    http://forum.incrediblecharts.com/messages/427230/2618643.html

    Materials Sector (XMJ)

    XMJ continues to show strength as it rides up in the ascending channel but it is reaching the upper boundary of this channel.  The upper boundary could provide some short term resistance at these levels as the W%R indicator rides up into overbought territory.

    We can see from the chart below that there is support at the 13200 level but should that not hold then we could see a move down to the lower boundary of the ascending channel near the 12600 level some 8.5% below the current level.

    Financials excl. LPTs (XXJ)

    Whilst this sector is also in an ascending channel, it is clearly in a more sluggish pattern and showing signs of the strain.  The following chart shows the support and resistance trend and channel lines.

    Currently the sector is in a slightly expanding wedge pattern within the ascending channel.  It has recently bounced off the lower boundary of the ascending channel and whilst the W%R indicator is approaching overbought territory, there does appear to be move ‘head room’ in this sector than what is available in the materials sector.

    It is possible therefore that the XXJ may in fact have more of a beneficial effect on the overall market than the XMJ in the coming weeks.

    Summary

    With the S&P500 approaching the completion of its Minuette wave (i) on Monday and a possible sharpish Minuette wave (ii) retracement, next week could have a negative tendency.  Should this be the case, it would have an effect on the Australian market which is also showing signs of some upcoming weakness.

    I still remain bullish in the medium term and if the EW count for the S&P500 is correct then once Minuette wave (ii) completes, we can then look forward to a strong move as wave (iii) comes into play.

    With signs of impending negativity starting to show, it will be very interesting to see what happens with the Conti high anticipated on the 10th December +/- 3 days.  Perhaps it may vaporize as quickly as it appeared.

    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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