In last weekend’s Market Wrap I suggested that there was a high likelihood of a rally into the 5th April based on Conti and my other cycles analysis methodologies. I must admit that whilst that was the expectation I personally pulled out of the market late last week in order to lock in ‘safe profits’. In hindsight this was obviously premature but my practice has always been to take a bite out of the middle of the cake in order to avoid stressful situations.
So far things are going pretty much to script and the pattern in play is becoming easier to see. The following chart shows my preferred EW count for the XJO. Note that 2 scenarios are shown. The first is one suggesting a Flat pattern (ABC) and the second scenario suggesting a Triangle pattern (ABCDE) for wave 4.
As can be seen from the chart, both scenarios suggest a significant fall in the near future.
During the past week the S&P500 has gained 1.42% based on close prices. In the last session it peaked at 1337.85 finally closing at 1332.41. Whilst the market continues to soar, ‘under the bonnet’ we continue to have cautionary indicators suggesting that ‘all is not what it seems’. Refer to the following chart which continues to show divergence between price and momentum.
On the positive side we can see that the MBB continues to provide support for the current rally leg. Note also that the UBB is currently located at 1337.58 and it does appear that this is the level that the index will attempt to reach early next week.
In case the index attempts to form a ‘double top’ we should remember that the high on the 18th February was 1344.07. The 88.6% Fibonacci level is at 1333.24 and the last session’s close was at 1332.41 hence it is obvious that this Fib level was tested but failed. I fully expect this Fib level to be exceeded next week with the ‘double top’ level as the primary aim. Whether it achieves this lofty goal remains to be seen.
The following planetary chart indicates that the Saturn line at 1336 was the main obstacle for the S&P500. I personally believe that it will continue to play an important part in the coming week also.
If it can overcome that particular overhead resistance then the North T Node at 1350 comes into play.
The following chart produced by Andrew shows the index enveloped by 3 standard deviation envelopes. I have always found this chart to be extremely useful in estimating potential tops and bottoms for the index. Note that the significant peaks on the last two occasions have occurred 2 standard deviations from the mean (indicated by the pink moving average).
We can clearly see from the above chart that should recent history repeat then we are getting very close to the top.
Due to the lead from Wall Street the ASX200 futures contract is currently expecting a positive open on Monday of 33 points. The ADRs on the NYSE had BHP up 1.29%, RIO up 0.82% and WBC up 1.32% thus suggesting a strong open on Monday morning for the XJO. In the last week the XJO gained 2.5% based on close prices so it has had a stellar week easily outperforming the US market.
Andrew’s cycle chart showing the 3 standard deviation envelopes indicate just how stellar the performance was. What is equally interesting is that the XJO will exceed the 3rd standard deviation band on Monday’s open thus putting it in an extremely dangerous condition. Andrew’s statistics show that no index can stay above the 3rd standard deviation band for more than 1% of the time thus putting our index in a very dangerous overbought condition.
Unlike the S&P500 the XJO has not reached the 88.6% Fibonacci level at this point in time. This level is located at 4891.16. In its last trading session it peaked at 4878.8 finally closing at 4861.83. If the XJO does open 33 points up on Monday morning then it will reach 4894.83 which is above the 88.6% Fibonacci level.
Since I have been lucky enough to have access to Andrew’s 3 standard deviation charts, I have yet to see the index stay above the 3rd standard deviation for more than 2 days so if the XJO is to attempt to reach the previous high of 4944.4 (set on the 17th February 2011) then it will have to do it in the next 2 trading days. I personally would be surprised if it can accomplish this feat.
The following planetary chart shows that there is overhead resistance at the Saturn line located at 4938 which suggests that it would be possible to get close to the double top. I will watch with interest to see if it can do so. From my perspective any move to that sort of level would be an exhaustion move which could give an equally strong move down.
Traditional Technical Analysis Charts
Looking at the more traditional TA charts we can see from the following 90 day chart that the XJO is in a strong trend. The price is tending to hug the underside of the UBB quite a distance away from the MBB thus indicating the strength of the trend. The UBB is currently located at 4894.7 which happens to coincide with the proposed open for the XJO on Monday.
We can also see that whilst the LOI is not rising as rapidly as the price action, it is not extremely bearish at this stage. In fact it is neutral and showing signs of topping..
In the daily chart we can see that the UBB is currently located at 4892.7 which is slightly lower than that shown in the 90 minute chart. The LOI is still currently in a rising ‘buy’ condition.
So we can see from the above traditional technical analysis charts that there are no real obvious warning signs of a potential change in direction. It is for this reason that the G4 look to methodologies other than the purely traditional TA methodology to assist in gaining a more complete picture of the state of the market.
So if we couple all of the different methodologies briefly mentioned in this market wrap we come to the following conclusions:
- The XJO continues in a strong rally at the moment as shown by the traditional TA methodology
- The rally is entering an extreme overbought condition as suggested by the 3 standard deviation chart
- The rally is nearing completion as suggested by our various cycles analysis methodologies
- The price action is due for a significant decline as suggested by our Elliott Wave analysis methodology
The Price of Copper
Copper is one of the primary indicators of economic activity. The following chart is from an article on the Safehaven website which you can read on the following link:
I found it extremely interesting and it is my view that it shows us that we could easily be heading for a strong move down in the price of copper which in turn will be reflected in the overall market.
Next week could be crunch time for the markets. Whilst the indications are that early in the week the markets may continue to climb, there are a number of cycles based indications that the coming weeks will become quite bearish. I have often suggested that the ‘TIME’ component of technical analysis is the most difficult to pin down. At this stage I remain of the view that the 5th April could mark the point in time where the sentiment in the equities markets may turn from extremely bullish to extremely bearish.
For the above reasons whilst my timing could be a week or two out (I however doubt that) my expectations for the medium term (say 2~4 weeks) are bearish.
The information in this market wrap is provided for educational purposes only and does not have regard to any particular person’s investment objectives, financial situation or needs. The information must not be construed as advice to buy, sell, hold or otherwise deal with any securities or other investments. Accordingly, no reader should act on the basis of any information in this market wrap without first having obtained investment J