What does it mean when Conti turn cycles and Fibonacci levels of support and resistance at one level are sliced through like a hot knife through butter? Does that mean that they are no longer useful and are to be thrown on the trash heap? I answer that with a resounding no. What it means is that we need to move one or more levels up because we have a higher level pattern overpowering the lower patterns.
There is no doubt that during periods of extreme negativity, investors will run for the exits and bears come out in large numbers. Will they be right? I would not suggest that their views are incorrect but would rather suggest that the time to get overbearish is not here yet.
That we are going through a retracement of significance at this time is obvious. We have been suggesting that a decline of this magnitude was on the cards for months. I personally thought that we still had a minor leg up to go before this higher magnitude decline appeared but the fact that it has arrived at this point in time is irrelevant to the higher level patterns and cycles in play.
What still has to be determined is whether the rally that commenced in March 2009 is really over or not. I would suggest that that determination has not yet been made.
Let’s start with the daily chart of the S&P500 covering the period of the rally from July 2010. I have superimposed a green line to represent the range of the fall that took place during November 2010. Note that the current decline is similar at this stage to the decline that took place at that time.
Note also that the Line Oscillator Indicator is also at approximately the same level as it reached at the bottom of that particular decline. Now I am not suggesting that it won’t fall further this time but I am saying that at this point in time, the current decline is of the same level as that which took place in November 2010.
From an Elliott Wave perspective, note that the decline in August 2010 that preceded these two latest declines was obviously a much larger decline. This suggests that the August decline was probably at a higher level than the decline in November 2010.
This suggests to me that there is a strong possibility that we completed a higher level pattern in the period between June and August 2010, and because there have only been 3 waves up at the same level since that period we are in the process of forming a 4th wave.
Should the current decline go into some sort of consolidation stage it could mean that the current decline is a 4th wave of an impulse wave which still has one more leg up to go.
Note that I have shown 3 different levels on the above chart. The red level is the higher level pattern and covers the period from June to August 2010. I suspect that the peak in mid June 2010 was a wave 1 at the higher level and the bottom in late August was a wave 2 at the higher level.
I suggest that it is possible that the blue (level 1) and green (level 2) channels are the boundaries of the lower impulse pattern that has yet to complete.
The lower boundary of the green level 2 channel is located around the 1275 level so a further move to that level would not surprise me. In the following weekly planetary chart we can see that the price action bounced off the Neptune planetary line and is bounded by the strong Saturn line on the upside. It does not surprise me at all to see the strong Saturn line sitting below the current price action at the 1275 level.
The following weekly chart of the S&P500 is provided to give some perspective on the larger moves in play and the channels within which these moves are occurring. We can see that the latest lower level green channel was travelling at an unsustainable rate. In view of this and that fact that it was approaching the upper boundary of the long term red trend channel, a retrace was almost inevitable.
The following 60 minute chart of the S&P500 gives us some perspective of the price action that occurred in its latest trading session. Whilst there was a strong bounce, the price action closed fractionally below the MBB. The price action is clearly playing within two downward trending channels and I would suggest that further downward movement towards that 1275 level is still on the cards.
The last trading session on Wall Street has left the ASX200 futures contract suggesting a move up of 8 points on Monday’s open. The ADRs on the NYSE has BHP up 1.24%, RIO up 1.53% and WBC up 1.16% so there is a discrepancy between the indications provided by the ADRs and the ASX200 futures contract as to the potential market action for our market on Monday.
Based on the above 60 minute chart of the S&P500 I don’t believe that the big fund managers’ technical staff will be all that optimistic and I suspect that Australian market will continue on with its current negativity albeit at a reduced momentum.
The following weekly chart of the XJO shows just how negative the Australian market is compared to the US market. It unfortunately has broken through the long term trend line for the March 2009 rally which is not a particularly positive sign. Whether the new current ascending red trend channel will help in a more subdued future rally remains to be seen. As can be seen the LBB is currently sitting at 4582.2 which I suspect will be the minimum that it will fall to in the coming week.
The following daily chart of the XJO gives a clearer indication of where the index is headed. I suspect that it will head towards the lower boundary of the red channel at the 4550 level as a minimum.
The following planetary chart shows a slightly grimmer picture as it suggests that if the current levels don’t hold then the Uranus planetary line at around the 4500 level is on the cards.
The following daily chart confirms the planetary chart. I have drawn green ‘measuring stick’ lines on the chart indicating where the price action will go to in order to achieve the same range as that last significant decline. The level suggested is around the 4500.
Note that currently the Line Oscillator Indicator (LOI) is at about the same level as during the more recent smaller declines. Should the larger decline be on the cards we can see where the price action on the larger decline was at the equivalent level of the LOI (refer to red lines on chart).
From an EW perspective, I suspect that by the time we get down to my anticipated 4500 level, we will probably have formed a 5 wave pattern. That would not be a very good sign for the XJO as it could indicate a number of bearish scenarios including:
1) That a Zigzag was forming that could take the market down to around the 50% Fibonacci retrace level of the March 2009 rally at around the 4073 level.
2) That we had formed wave 1 of a much larger impulse wave down.
They are the bearish scenarios and always have to be kept in mind when determining future investment strategies. It is at times very difficult to differentiate between an impulse wave and a 5 wave corrective pattern
From a 4 year cycles perspective we suggest that the 4500 level could also mark the bottom of the decline which would then provide that last rally leg up into the middle of 2011 that has been discussed so often in past market wraps.
The following weekly chart of the XJO is one that is relatively encouraging at this point in time. The LBB is currently located at 4582 but the LOI has remained elevated. We can clearly see that it currently shows no sign of breaking down in spite of it having been significantly declining for the last 3 weeks. Contrast this with the LOI on other occasions in the past when a significant decline was underway.
So in this regard we do have some divergence in the weekly chart for the XJO which is a positive sign for the bulls.
In a number of past Market Wraps I had suggested an interim market top between mid March and early April. That has obviously been turned on its head. In the study of market cycles confusing tops and bottoms is a common occurrence.
Since the recent peaks in the US and Australian markets, the S&P500 has dropped 4.0% and the Australian market has dropped 6.3%. I personally suspect that there is a bit more to go in both indices. The bears are out in large numbers and many of the bulls are having second thoughts. We are at a threshold in the patterns developing in the markets. The Australian market is clearly much weaker than the US market but in spite of the extremely negative sentiment, it is still possible that the March 2009 rally has not yet completed.
Once again, due to the conflicting outcomes suggested by different methodologies I am somewhat neutral in my stance towards the market but have a leaning towards the positive in the medium term.
If it is the case that the recent tops did mark the end of the March 2009 rally for the US and Australian indices then we would currently be in a wave 1 at some level. Once complete it would form a wave 2 and these commonly reclaim at least 50% of the wave 1 range. That time would give investors an opportunity to exit the market.