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G4 Weekly Market Wrap, 18th March 2011

  • Written by Syndicated Publisher 292 Comments292 Comments Comments
    March 19, 2011

    I found this week’s Chart of the Day article of interest so have added it to the market wrap.

    “Today’s chart illustrates how the stock market has performed during the average pre-election year. Since 1900, the stock market has tended to perform well during the first seven to eight months of the average pre-election year. For the remainder of the year, pre-election performance has tended to be more flat/choppy. This pre-election year has followed the path of the average pre-election year rather closely with a rally up until mid-February and a correction into mid-March with the aftermath of the devastating Japanese earthquake and tsunami weighing heavily on the market over the past few days.”

    GENERAL COMMENTS

    The coming week should tell us a lot more about the nature of the decline and whether the market will be bullish or bearish for the next few months. This is particularly so for the XJO. Whilst we had a strong day in its last trading session, the index has remained in a strong channel which is typical of an impulsive move.

    From the perspective of the bulls, it is extremely important for the rally to continue so that the upper boundary of the descending channel is breached. The price action in the coming week should tell us which way this market is going to head in the coming months. The following 60 minute chart of the XJO clearly shows the descending channel in question.

     

    Should the downward channel be respected and an impulsive pattern emerge in the next wave down then it opens up two bearish scenarios for the future market action. I have represented the recent decline in the index from the 17th February in dotted red lines on the following diagram showing these bearish scenarios.

     

    It should be noted that for both bearish scenarios, an impulsive pattern is required to complete the pattern of either 1 or A. That impulsive pattern would take the form of either an impulse wave or an ending diagonal.

    Whilst a lower low than the previous low is common, it is not necessary. A failed 5th wave would provide a higher low but would still represent a legal impulsive pattern. The critical thing that needs to be monitored is the nature of the pattern that develops over the next week.

    The other important thing to note is that in both cases, a rally at a higher level should take place once the impulsive pattern is completed. This could allow those long in the market to exit at more optimal price levels if the bearish scenarios become obvious.

    Whilst I personally remain bullish, I only mention those bearish scenarios in order to ensure that bullish investors are aware of the potential danger lurking in the XJO at present. Should the upper boundary of the descending channel presented in the first chart be breached significantly in the coming weeks then the bulls can breathe easy again.

    US MARKET

    During the last couple of days, the S&P500 has managed to rally and recover around 31.8% of the 7.1% decline that had occurred since the 18th February. Note how close that is to a 32.8% Fibonacci retracement. The positive divergence showing up in the 60 minute chart below is a positive as is the break up through the upper boundary of the short term red channel and the fact that the price action is currently above the MBB.

     

    The main challenge for the index is to breach the UBB. Even more important is the need to breach the upper boundary of the descending blue channel. The following daily chart for the S&P500 clearly shows that the index is currently in a short term declining channel and has reached a critical point for the index as it has bounced off the lower boundary of a long term bull channel.

    Note that whilst the Line Oscillator Indicator (LOI) has started to turn, it has still not given a buy signal for the index in the daily chart time frame. However in the shorter time frame the above 60 minute chart gave a clear buy signal in the LOI on Thursday.

    For bulls, it is critical for the index to respect the lower boundary of the blue channel and for a buy on the LOI to be initiated.

     

    The following planetary chart for the S&P500 shows that the index bounced off a Saturn line and made its way above the Saturn line located at 1275.

     

    Based on the planetary chart any decline in the coming week should find support at 1275, 1260 or 1246.

    AUSTRALIAN MARKET

    Whilst the S&P500 managed to close at 1279.2 (+0.43%) after peaking at 1288.88 the ASX200 futures contract is suggesting a negative move of around 18 points on Monday’s open. The ADRs on the NYSE had BHP up 1.84%, RIO up 0.93% and WBC up 1.88%. It should be remembered however that prior to the US market open our BHP had moved up 1.97%, RIO moved up 1.64% and WBC had moved up 1.3% so those moves were probably built into the ADR prices. The end result meaning that the ADRs at the close were negative with respect to market open prices.

    Hence based on the above information, there is a high probability that the XJO will open lower on Monday morning.

    I have already cautioned readers about the dangers lurking in the pattern forming in the short term XJO price pattern so won’t continue with that subject.

    The following 60 minute chart clearly shows that the LOI had given two buy signals in the last week. Since those signals the index has moved to the UBB and has given a positive divergence signal between price and the LOI.

     

    The above conditions represents the good news however we are now in a short term overbought condition and the suggested decline in the index on Monday’s market open has been created by this overbought condition. A retrace is required to relieve this overbought condition.

    Last week I suggested that a move down to the lower boundary of the longer term channel near the 4550 level was a likely target in the coming week. Well it made that suggested move and even managed to spike down around the 4774 level on two occasions (4779.7 and 4774.4) forming a double bottom from which to launch into a bit of a rally.

    We can see clearly from the chart that the index has moved away from the LBB however (as with the S&P500 daily chart) the LOI has still not initiated a buy signal in spite of it indicating a reduction in downward momentum in the price action.

     

    The G4 Lunar studies indicate the coming week as a pretty benign week in terms of where we will be at the end of the week relative to where we start at the beginning of the week. For that reason I would suggest that whilst there may be declines during the week, it should not do too much damage to those long in the market.

    In the weekly planetary chart for the XJO below I managed to cut off the time axis however it covers the same period covered in the S&P500 chart provided earlier in the Market Wrap. Note that the index bounced off the Uranus line near the 4500 level and made an attempt to close above the overhead Saturn lines. Unfortunately it was not able to achieve this and may suffer the consequences of this failure in the short term.

    Note shown on the planetary chart below is a downward trending Pluto and Mars line that should have a negative effect on the XJO in the short term.

     

    XJO VERSUS ETF GOLD

    I would just like to briefly make a few comments about the stock ETF GOLD (Australian market) and the XJO. There have been many times in the past when this stock was used by investors as a hedge against falls in the XJO as this stock and index often move in opposite directions.

    We can see from the chart below that there are times when this strategy would work and other times when it would fail dismally. We can see that during the period between September 2010 and November 2010, both trended upwards. In more recent times whilst they did more in opposite directions, the range of the moves were quite different. During the period from February 17th through March 17th, the XJO moved down 10.4% whereas the ETF GOLD only moved up 4.3%. Still a profit but not as convincing as normal.

    The other noteworthy observation that can be made from the chart below is that the LOI on the ETF GOLD is clearly in a ‘sell’ condition and shows no sign of reversing this trend. Whether it is able to find support at the MBB around $136.87 remains to be seen.

    Note also the fact that the price action has been going up whereas the LOI has been going down. This negative divergence does not provide a very positive signal for this stock for the short term. Note that the weekly chart shows why the stock is currently declining. The stock reached the UBB on the weekly chart hence putting it in a potentially overbought condition.

    The good news for holders of ETF GOLD is that the weekly LOI is on a ‘buy’ signal hence the medium term prospects may be positive for the stock.

     

     

    SUMMARY

    As suggested in the comments above I suspect that both indices may suffer from weakness in the early part of the week however I would be surprised if prices were much further down by the end of the week than when they closed in their last session . Our Lunar studies would indicate that there is a high probability that in the following week we could see higher prices. Naturally enough the timing is not exact as these periods tend to overlap slightly.

    I continue to maintain a leaning towards bullishness in the medium term (say May/June) however would become bearish if the current declining pattern in the XJO completed an impulsive descending pattern in the coming week or two.
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