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G4 Weekly Market Wrap, 25th February 2011

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    March 1, 2011

    I thought that readers would be interested in yesterday’s Chart of the Day post.

    Today’s chart illustrates how the recent rise in earnings has impacted the current valuation of the stock market as measured by the price to earnings ratio (PE ratio). Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From 1900 into the mid-1990s, the PE ratio tended to peak in the low to mid-20s (red line) and trough somewhere around seven (green line). Notice how investors were willing to pay much more for one dollar of earnings during the dot-com boom, the dot-com bust and financial crisis. Currently, with 94% of US corporations having reported for Q4 2010, the PE ratio stands at 17 which is a relatively low level when compared to the past two decades.

    For those readers who have been following my two threads in the Incredible Charts forum (see http://forum.incrediblecharts.com/messages/427230/2591748.html and http://forum.incrediblecharts.com/messages/427230/2874838.html ), they would know that I have been suggesting all week that it was my view that the correction that took place last week would end by the 25th February. At this stage that appears to have transpired.

    There are some analysts who suggest that the decline that we experienced in both the XJO and SPX could be an “a” wave of an “abc” corrective pattern. That could still turn out to be the case however my cycles analysis suggests that the bounce that started in the last trading session in both indices should last until the mid March /early April period.

    It was pointed out by Andrew on the Elliott Wave Watching thread above that a 19 day Conti cycle has appeared and the projected date for the short term bottom of that cycle coincided nicely with the 25th February date arrived at by other cycle analysis methodologies. We can see that the bounce transpired exactly on the projected date. If this Conti cycle continues then it will also form a top in the period of mid March /early April suggested by other cycle analysis methodologies. For the above reason I personally hold the view that the move down this week was not an “a” wave but rather the end of a short term correction that will lead to a short term rally lasting a few weeks.

    Following this rally my cycles’ analysis points to a decline of several weeks (3 to 6 weeks) that will form a bottom from which the final significant rally leg of the March 2009 rally will launch.

    I should always stress that technical analysis deals with probabilities rather than certainties. At this stage the above scenario is what my analysis suggests will be the highest probability scenario.


    In the last trading session for the S&P500 it peaked at 1320.61 and finally closed near the top of its range at 1319.88. Hence it retraced around 51.45% of the 3 day decline.

    The daily chart below gives us a good view of what happened in its last session. The bounce off the lower boundary of its medium term channel was obvious and gave the bears a message that the bulls were not dead yet.

    The 99 minute intraday chart of the S&P500 shows us that the recovery put the index in a neutral position in the short term and we can see that there is a reasonable amount of support below the immediate price action on which to consolidate if the market chooses to do so.

    Planetary Chart

    As stated in past Market Wraps, the last weekly candle on the planetary charts is always shown in blue (feature of the charting package used). In normal charts the last weekly candle would be red (indicating a negative week).

    We can see from the planetary chart below that S&P500 last week had found resistance around the 1337 level (Saturn) and commenced a savage decline. It bounced near one of the Neptune lines and has been momentarily stopped at another one of the Neptune lines. The obvious near term target levels are 1337 (Saturn), 1350 (North T Node) and 1363 (Saturn) lines.


    We should remember that I have discussed a number of Fibonacci lines near the 1360 level in past Market Wraps.

    1361.5 is the 76.4% Fibonacci retrace of the October 2007 to March 2009 plunge.

    1360.38 is the 100% Fibonacci extension level off the last rally leg.

    If we couple the above Fibonacci target levels with the planetary Saturn level at 1363, we can see that this level should present a formidable level and will possibly be the peak of the rally that I believe has just started.


    The last session on the US markets has provided a positive lead for the Australian market. Currently the ASX200 futures contract is suggesting a positive move of 20 points on Monday’s open. The ADRs on the NYSE are suggesting an even more aggressive move up as BHP was 3.36% up, RIO was 2.13% up and WBC was 2.33% up.

    We can see from the XJO daily chart that in spite of the decline last week, the index remains in a strong bull channel.


    The 99 minute intraday chart provides some overhead Fibonacci resistance levels at which the index may falter during what I believe will be a rally leg into mid March /early April.


    As with the planetary chart for the S&P500, the following planetary chart for the XJO shows the last week’s candle as being blue. In reality it also was a negative red candle week on standard charting packages.

    As with the S&P500, the Saturn line caused the resistance a couple of weeks ago to the advance of the XJO and the Neptune line provided the support. It remains to be seen whether the XJO can stage a similar level of bounce to that which has occurred in the US index.


    Counter Argument to my Cycles Analysis Scenario

    In my Market Wrap last week I presented a daily XJO chart which showed obvious divergences between the price action and momentum indicators for two separate periods during the past few months.

    I used this chart to suggest that the recent period had price to momentum divergences that were somewhat similar to (but not as bad as) a previous period. From that analysis I suggested that we should expect a decline in the index but one that would possibly not be as great as in the earlier period.

    Once again I present the same chart for analysis. Now I have already stated that I anticipate that the bounce that we have just experienced was a ‘real’ bounce and not one that will fail in a few days.

    There are many counter arguments to this analysis and in the spirit of balance I point out the following things in the following chart. First of all is that the price action is currently between the middle and lower Bollinger Bands.

    The second observation is that the Line Oscillator indicator has not yet turned up.


    The above observations are legitimate technical reasons for suggesting that a further decline is a possibility.

    It is this sort of conflict in observations between outcomes of different methodologies that makes it difficult to accurately predict likely future price action at times. At times all methodologies agree and the degree of confidence builds up dramatically. At other times like now, we have to remain cautious in our investment strategy in order protect our capital.

    At this stage I have greater faith in my cycle analysis than the above more standard type of technical analysis however I remain cautious. The reason for my greater faith in my cycle analysis at this stage is that it is a ‘forward seeking’ methodology whereas the above analysis is using indicators (Bollinger Bands and momentum) that are derived from past events thus by definition making them lagging indicators.

    We must always however remember that the one thing that all technical analysis methodologies have in common is the fact that they provide ‘high probability scenarios’ rather than 100% guaranteed scenarios. During any market phase we can find that one methodology comes to the fore whereas others fall into the proverbial ‘pit. During these periods the analyst needs to make a judgment call.


    Repeating what I have said in the above detailed section of the market wrap. It is entirely possible that the bounce in equity markets both in the US and Australia are “b” waves of an “abc” corrective pattern that is only half complete.

    However it is my personal view that the bounce that we are experiencing at present is real and that it will continue rallying (with the obvious small retracements along the way) until mid March/early April and that the recent highs that occurred on the 17th February for the XJO and the 18th February for the S&P500 will be exceeded during this period.