Long term readers of my Market Wrap would be aware that I occasionally bring out my 3 favourite Bear Market charts in order to remind readers that they need to look at the larger cycle patterns in play in order to keep individual long term trends in some sort of perspective. I usually do this when I believe that a major turning point is approaching in the current cycle and it is my view that we are approaching one of those crucial points in the cycle.
As with most cycle analysis work there is a degree of “order of accuracy” slippage in picking the time of turning points. We have already seen that short term Conti charts tend to have an accuracy of +/- 3 trading days. When we look at larger time frames the order of accuracy is possibly +/- 3 months. G4 attempt to improve on this ‘order of accuracy’ problem by using the shorter time frame cycles to fine tune our analysis.
Throughout the GFC, G4 have suggested that the market top in 2007 for both the US and Australian markets represented a ‘Cycle’ level wave 3 and that the entire GFC would be a multi-year wave 4 cycle. This Cycle level wave 4 would end up being either an ABC 3 wave pattern or a more complex ABCDE 5 wave pattern.
The following Bear Market examples were all ABC 3 wave patterns. The reason for presenting them in this Market Wrap is to show readers that large Bear Market patterns can have significant rally legs.
The first of these was the DOW 1929-1932 market crash. Here we can see that the initial crash took around 50% off the DOW in 10 weeks. This was followed by a rally which lasted 22 weeks and recovered a bit over 50% of the original decline. The chart below clearly shows the devastation that was created for investors during the final third wave of the pattern.
The second example was the Nikkei Bear Market crash during the 1990’s. Once again there was a significant initial decline over a 32 month period that took around 63.3% off the value of the index. This was followed by a complex rally that recovered around 38.2% of the initial drop over a period of around 47 month. Unfortunately for the Japanese investors the pain was not over as the index once again fell in the subsequent 3rd wave.
The final example is the more recent crash in the Nasdaq index that occurred in 2000. We can see that the initial decline took around 40% off the value of the index over a period of around 42 trading days. Once again there was a rally phase that recovered around 61.6% of the initial decline and as with the other examples there was a third wave that caused further suffering for investors.
The thing that all 3 examples of Bear Market crashes have in common is the fact that the third wave ended further down than the initial wave A.
Those readers familiar with Elliott Wave analysis would be aware that 3 wave patterns often fall into the Zigzag or Flat pattern categories. Zigzag patterns on most occasions have a wave C that terminates lower than the original wave A. Flat patterns come in 3 general varieties. The most aggressive of these will have a wave C that terminates below the termination point of wave A. Usually however they do not go down as far as a Zigzag pattern. The other two Flat patterns will tend to terminate their wave C at either around the same level as the wave A termination level or higher up.
The Current Pattern
During the wave B phase of a market crash, investors will often believe that the worst is over and that they are in the beginnings of a new bull market. This is particularly the case when waves A and B last for months. Most investors would be aware that the current bear market crash had a wave A that lasted around 17 months and wave B has been underway for around 25 months.
There are many views on the current state of the GFC ranging from extremely bullish (we’re in a new bull market) to extremely bearish (we have already started the trip down to share market oblivion). G4 disagree with both of these extreme views. Our view is that we are currently in Primary wave B and that this particular rally that started in March 2009 is coming to an end in the not too distant future. Our time frame for an end to this wave is in the period of May to July. At this stage we are working on a top being formed in the US and Australian market sometime around the 6th ~ 13th June. Slippage could see a top earlier (sometime in mid to late May) or later (sometime in July).
On the 15th April I posted the following chart on the Incredible Charts forum depicting my current EW count for the S&P500.
On Friday the 22nd April I posted the following chart as an update on the last part of that cycle.
The above chart assumes that Minute wave 2 has completed. It is possible that it has not yet completed and in this case we would see another move down towards the lower boundary of the channel in order to complete the pattern.
In any case once Minute wave 2 is completed; there should be a strong move up in Minor wave 3.
How Will This GFC Progress From Here?
What is clear is that waves A and B of this GFC have taken from October (in the case of the US) and November (in the case of Australia) 2007 to the current period. If we do get a market top in June 2011 as G4 anticipate then waves A and B would have lasted around 43~44 months. As the 4 year cycle that has been discussed so often in this market wrap will in part help to bring about the anticipated market top then it stands to reason that the 4 year cycle will bottom out in about 2 years from now (ie, 2013).
Keeping things really simple and remembering that these cycles are not sine waves (ie constant period and amplitude) but are in fact complex waves (variable period and amplitude) we can get an approximate guide to the future from the following logic:
Market top 2007
Market bottom 2009
Market top 2011
Market bottom 2013
What is uncertain at this stage is whether the eventual larger pattern will be a 3 wave ABC pattern or a 5 wave ABCDE pattern. Comparing the 2 patterns we should note that the 5 wave pattern is the more benign of the two patterns because it means that wave C will not take out the March 2009 low. The disadvantage of 5 wave patterns however is that they usually chew up more time than 3 wave patterns.
Note that the S&P500 at the current time has almost retraced 75% of the initial decline. This tends to lean towards the probability of the final pattern being either a Flat (3 wave) or a Contracting Triangle (5 wave) pattern rather than a Zigzag because Zigzag wave B’s tend to be less than 70% of the range of wave A. It is for this reason that I doubt the logic of the super bears in the market having the view that the market will head south to oblivion. In my view, there is a greater probability of the March 2009 low remaining intact.
How Quickly Can Things Turn Sour?
One of the sectors that has been driving the market is the commodities sector. The precious metals sector in particular has been in a clear ‘blow off’ pattern. Silver has been the outstanding performer but Gold has been doing its bit in spiking up the commodity sector.
I have highlighted periods in the long term chart for Gold (starting in 1978) where blow off patterns have very quickly reduced the value of this precious metal. Whilst the ride up can be exhilarating, the drop down can be devastating for those who fail to take profits at the right time.
Summarising the long term pattern discussion
Elliott Wave analysts generally fall into 3 distinct groups in their reading of the current long term pattern.
The Extreme Bulls
These bulls believe that the GFC completed in March 2009 and from that period onwards the market commenced a new bull market that will continue its upward march to new highs in the years ahead.
The Extreme Bears
These bears believe that the 2007/2009 plunge was a wave 1 down and that the current rally is a wave 2 in a large impulse wave that will eventually take the market down to an Armageddon type of global economic disaster. There is some contention as to whether wave 2 has completed yet or is just about to complete.
The Middle Path
G4 belongs to this group of analysts. Our view is that the current rally is Primary wave B of Cycle wave 4 and that this will be followed by a Primary wave C of either an ABC 3 wave pattern or Primary wave C of an ABCDE 5 wave pattern. Once this corrective pattern completes, it will have formed Cycle wave 4 and following that period there will be another Cycle wave 5 (new bull market) to complete an impulse wave at the Super Cycle level.
We are currently reaching a point in the Cycle level pattern where one of two things will happen. If the markets continue to move up into 2012 and 2013, the Extreme Bulls will have been proven to be correct in their reading of the market. The Extreme Bears and Middle Path analysts will end up with egg on their faces and will probably take up some other mental activity to exercise their minds like Suduko or cryptic crosswords.
If the markets start to turn down into 2012 and 2013 then it will be the Extreme Bulls that will have egg on their faces. We will then enter into a part of the cycle where it will still take a number of years to determine which of the remaining two classes of EW analysts are correct in their reading of the market.
G4’s view is that Primary wave B will complete sometime in the May to July period and we currently believe the highest probability outcome is that a completion of this wave B will take place sometime in the first half of June. On this basis we believe that the February 2011 highs will be taken out in the near future.
Hopefully the above comments have set the context within which the following shorter term analysis in the Market Wrap can be read.
In last week’s market wrap I made the following comment:
“So we can gather from these two different seasonal methodologies that next week should not be too excessive in terms of declines and in fact may be positive.”
The above comment came about because of the G4 lunar phase studies and the seasonality indications given in the Safehaven article. As it turns out, in spite of a dramatic decline in the S&P500 on Monday the 18th, the index ended the week up by 1.34%.
We can see from the chart below that we have reached a critical level in the S&P500.
We can see that the 23.6% Fibonacci extension level of 1350 has now been approached a couple of times and once again the index is attempting another approach. To date, the index has been unable to reach this level which is an indication of just how strong this level is. There are some analysts who believe that the current levels are likely to mark the top of the March 2009 rally. If my EW count on page 3 is correct then this level will be taken out in the short term and the 38.2% Fibonacci extension level of 1431 will be tested before June 2011.
Assuming for the moment that this level will be taken out in the near term, we can see that there are a number of Fibonacci levels that could present obstacles for any progress in the S&P500 rally.
We can see from the chart below that there are a number of Fibonacci confluence levels for the S&P500 at 1384, 1409 and 1430. A combination of the chart below and the previous chart indicates that around the 1430 level we have a very strong Fibonacci level and this level should present a significant overhead resistance if the market progresses beyond current levels in the medium term.
The weekly S&P500 planetary chart indicates that there are even closer overhead barriers to any rally at the following levels to the current price action than indicated by the Fibonacci levels mentioned above.
1350 North T Node line
1364 Saturn line
1379 Neptune line
1410 Neptune line
Note that the North T Node line at 1350 coincides accurately with the 23.6% Fibonacci extension level mentioned previously. It is no accident that this level is currently presenting such a strong obstacle to the rally in the S&P500.
Traditional TA View of the Current Market Action
The short term 99 minute chart of the S&P500 shows that momentum is dropping off at current levels in spite of the UBB currently being located at 1346.12.
This could indicate a temporary overbought condition and a pull back is a possibility in the short term.
Looking at the daily chart of the S&P500 we can see that the index continues to climb in an ascending channel and that the Bollinger Bands are starting to contract. This would indicate that we may be getting a pressure build up for a significant move.
The price action is currently nearing the UBB and the LOI has started an upward move. It remains to be seen whether the overbought condition in the shorter time frame chart will cause the LOI to turn down again.
So we have a few opposing indications once again showing up between the different methodologies used by the G4. The traditional TA methodology indicates that whilst a significant move could be in the making, there is the possibility of a short term pull back. It is clear that we have a ‘triple top’ situation in the making which could drive the index in either direction. If it can get through the current level then a strong move could result.
The Safehaven Technical Market Report at the following website http://www.safehaven.com/article/20731/technical-market-report-for-april-23-2011 suggests the following:
“Prices rallied last week, out running the indicators to the upside and leaving the market slightly overbought in the very short term. The indicators have not deteriorated enough to suggest a top, but, without any seasonal help, the market is likely to experience a few rough days early next week.
I expect the major averages to be lower on Friday April 29 than they were on Thursday April 21.”
The G4 lunar phase studies suggest that the period between the 25th April and 3rd May should be strongly positive.
My EW count suggests that we should enter a strong move in Minute wave 3 provided that Minute wave 2 has completed.
Gathering all of this conflicting information from the various methodologies I am leaning towards a strong move up coming between now and the 3rd May which may be prefaced by some short term downside.
Whilst the US market had a positive last trading session, the ASX200 futures contract was left with a negative result of 6 points. This will no doubt change when we finally open on Wednesday morning as the US market will have traded prior to this market open in the Australian market.
The following weekly chart of the XJO shows us that the current price action is being hampered by the 50% Fibonacci retrace level of the 2007/2009 plunge at 4698.15.
So far we have had the following attempts at reaching this level:
October 2009, peaked at 4803.5
January 2010, peaked at 4955.1
April 2010, peaked at 5025.1
February 2011, peaked at 4944.4
April 2011, peaked at 4976.4
We can see that this important level has only been breached once in five attempts. A breach did occur after two preliminary attempts. The index however quickly reversed and move below this critical level after the breach.
Once again we have had another couple of attempts at breaching this level and I suspect that we will finally breach this level in the next attempt. If the XJO can successfully breach this level then the next Fibonacci level on the radar will be the 61.8% at 5426.15.
Traditional TA View of the Current Market Action
The short term 99 minute chart for the XJO indicates that the XJO is still in an upward trend. The LOI is not showing any loss of momentum at this stage and the UBB is still trending upwards.
The daily chart however is still showing a negative trend in the LOI and has not yet turned in the same way as it has on the S&P500 daily chart. On the positive side however is the fact that the price action jumped up from the MBB and is on its way up to the UBB at 4989.5. It clearly has its sight focused on breaching that all important 50% Fibonacci level at 4986.15.
The weekly XJO planetary chart below also shows the tremendous battle that the index will have in achieving a breach of the 50% Fibonacci level.
The XJO closed on Friday at 4913.8. We can see that there are currently Saturn lines located at 4926 and 4976 that need to be successfully tackled before there is any hope of conquering the 4986.15 level.
I should point out that the chart below only shows the Neptune, Saturn and Uranus planetary lines. Randall filters out all other planetary lines in order to simplify things for readers. If he showed all of the planetary lines on the chart it would look like a multi-coloured spaghetti mixture which would totally confuse readers.
The only problem with filtering out some of the other planetary lines is that readers cannot see what planetary influences there may be that could be assisting the XJO move in an upward trajectory. For this reason I have done a screen capture of a chart that Randall posted on his Astrology and Stock Markets thread on the 18th April. This chart shows some of the other planetary lines influencing the XJO (refer to chart titled “XJO riding up Sun and Venus lines” shown below).
Randall’s original chart had a black background and I have inverted the colours of the chart so that people can still print out this Market Wrap without using up lots of black ink. Unfortunately the process of inverting the chart colours causes some pretty weak foreground colours. We should also remember that the chart does not show the price action that occurred in the XJO subsequent to the 18th April. An updated chart would show that the index bounced off the Neptune line (refer to above chart) and proceeded to ride up the Sun and Venus planetary lines.
With any luck at all the XJO will continue riding up these planetary lines and breach the next overhead Fibonacci resistance level.
So, in spite of our various methodologies coming up with contradictory outcomes, I am leaning towards the US and Australian markets moving up between now and the 3rd
May into some possible negative headwinds.