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The Final Curtain – G4 Weekly Market Wrap 27th May 2011.

  • Written by Syndicated Publisher 35 Comments35 Comments Comments
    May 28, 2011

    No, the heading doesn’t relate to the market so don’t panic. As stated in Ecclesiastes 3: “For everything there is a season, and a time for every matter under heaven.”

    I can’t recall exactly when I first started writing this Market Wrap but I think that it was in late 2007 when it started becoming obvious to me that the market was due for a significant tumble. The original Market Wraps were written for a small group of friends either nearing or at retirement age who had very little idea about technical analysis of the share market in which they had their life savings invested. The Market Wraps were written to expose these friends to a way of looking at the market so that it wasn’t totally unfathomable to them. By providing a view of the market within some sensible context the Market Wraps were written to allow them to make more informed personal decisions about the safety or otherwise of the market at any point in time.

    As time went on, the Market Wraps attracted some excellent technical analysts who greatly added to my knowledge and in the case of many, became highly valued friends. It has been an extremely interesting period of my life and I have attempted to share the things that I have learned from others. Hopefully my readers have benefited from the things that I have shared.

    It is now time to recharge my batteries and to further research my current (and hopefully future) methodologies in order to improve my reading of the market. For this reason I will be discontinuing my Market Wraps for the time being.

    In last week’s Market Wrap I suggested the following:

    “It should be a very interesting week next week. One big question that will be answered is what effect will the positive Full Moon to New Moon influence have on the market?

    To me the S&P500 looks as though it will require a lot of help if it is to survive what could be a negative week. The XJO on the other hand could survive a negative start early in the week if that Saturn line provides support. If it doesn’t then it’s quite a drop to the Neptune line at 4610.

    Readers should be aware that the New Moon will occur on the 2nd June. New Moons are very often close to market tops so it would be a good time to put an end to the March 2009 rally in the S&P500. This doesn’t give it much time to pull out of its current negative technical’s in order to stage a rally into that time period. This even calls into question whether the earlier high of 1370.58 can be exceeded in the time left to form a top.

    As far as the XJO is concerned, I suspect that we have already seen the top of the March 2009 rally and that if there is a good rally it will probably fall well short of the previous high of 5025.1.”

    We got the answer to the first part of the comment. During a time of great volatility in spite of most technical indicators on the S&P500 indicating severe falls, the index was able to pull out of a dive to end the week a mere 2.16 (-0.16%) points down for the week. If the Full Moon to New Moon period lives up to its ‘average’ then we should see the index move up to the 2nd June or thereabouts.

    I have to admit that the XJO fell much further than I expected but it too recovered somewhat to end the week down 27.38 (-0.58%) points for the week. Considering the start that we had to the week, things could have been far worse.

    US MARKET

    In order to get some idea of where the market is headed it is worth while having a ‘top down’ look at the S&P500. Starting with the following weekly chart we can see the following.

    1. The index is struggling to stay above the 76.4% Fibonacci retracement level of the plunge from October 2007 to March 2009.
    2. There is a negative divergence between the price action and the LOI
    3. The index had been getting support from the MBB at 1319.89
    4. The UBB is located at 1364.75

    So we can see that whilst the index had been in a pretty strong bull rally since March 2009 being supported by the MBB for much of that time period, there are some negative pressures being exerted on the index in the coming months.

     

    Whilst it does appear that the index could continue its upward trajectory, it is starting to show the strains of the journey and does look like it’s ready for a rest. From my perspective, I suspect that the top of 1370.58 achieved on the 2nd May could well be it for this phase of the rally and depending on the price action in the coming months it could quite easily be the Primary wave B top that we have been expecting for months now.

    Next we look at the weekly planetary chart. We can clearly see the important part that the Neptune line played in providing a launching pad from the 1321 level. Directly above the current price action we can see the Saturn line at 1334 which will potentially act as an overhead resistance level for the index.

    Now whilst it’s possible that this 1334 level could bring this rally to a premature stop, I anticipate that the index will break through this overhead resistance and head towards the North T Node line in the coming week. The reason for this view is shown in the following daily chart of the S&P500.

    It can be seen from this chart that the move down from the top has taken place in 5 waves. 5 wave moves often mark the completion of a pattern. This can be the case in both an Impulse pattern and a complex corrective pattern. As the declining pattern may have completed, it becomes likely that a pattern moving in the opposite direction of some significance is on the cards. It is for this reason that I anticipate that a move beyond the 1334 level is likely.

    We can see from the chart that whilst the index has fallen through the red ascending trend line there is a medium term blue trend line that has not been breached and the price action is currently trading within a new channel bordered by the 3 green trend lines.

    Now we should note that the LOI is currently still trending down with a ‘sell signal’ in place so a further downward move is still possible in the medium term. There is also a slight negative divergence between the price action and the LOI signal confirming this possibility.

     

    The following 99 minute intraday chart of the S&P500 shows a short term positive divergence between the price action and the LOI signal.

     

    We can clearly see that the move down has taken place within the bounds of a descending red trend channel. The positive divergence and the beginnings of a narrowing of the Bollinger Bands could indicate that a move up out of that descending channel is a possibility.

    The following 60 minute intraday chart has a 3 wave move encircled in red. The reason for showing this view is to suggest that this gives me reason to believe that the entire move is corrective rather than impulsive. We can see that the move down has a number of overlapping waves. This is usually an indication that the entire pattern is corrective rather than impulsive.

     

    I should state that overlapping waves can occur in impulsive patterns where a series of 1-2 wave patterns are in play. However in those cases, the move down encircled by the red dashed line must be a 5 wave move (ie, an impulse wave or a leading diagonal). As that 3rd wave down is clearly a 3 wave move it raises a strong doubt in my mind about the move down being impulsive.

    Why is this important? The reason is that if the move down was corrective, then it means that there is still a rally leg left to go. If this is the case then it’s worth while setting some potential target levels for the move up. Now if we have a final leg up to go then from an Elliott Wave perspective we know that at some level, the final leg in a pattern is always impulsive (ie, an impulse leg or a leading diagonal).

    On most occasions we would expect that the final leg up would terminate higher than the previous high. On this occasion however, based on the higher level timeframes being somewhat negative, there is a high probability that this final rally leg will “truncate” which means that a new high “will probably not” occur on this occasion.

    With this in mind I have added the following chart with typical Fibonacci retracement levels. If the rally does ‘truncate’ then there is a reasonable chance that it may do so at one of these levels.

     

    AUSTRALIAN MARKET

    The lead from Wall Street currently has the ASX200 Futures Contract anticipating a 5 move up on Monday’s open. The ADRs on the NYSE had BHP up 0.91%, RIO up 1.27% and WBC up 0.14%.

    Using the same top down approach as we used on the S&P500 for the XJO we can see from the weekly chart that the XJO wasn’t able to recoup as much of the 2007/2009 plunge as done by the US index. The following chart shows us two significant things about the long term price action of the XJO. The first is that the XJO only recovered around 50% of the 2007/2009 plunge.

    Secondly we can see from the chart that the index has now had 4 attempts at breaking through that 50% Fibonacci level and has been unable to stay above it which is a quite negative.

     

    If we go back to basics we know that any retracement of 50% or less indicates that the original trend (which happens to be down) is still considered to be a strong trend. From an Elliott Wave perspective that means that any further downward trend could turn the overall GFC pattern into either a Contracting Triangle (best case) or a Zigzag (very negative). Being an eternal optimist, I am hopeful that we will end up with a Contracting Triangle for the duration of this GFC rather than the extreme Zigzag case.

    We can see from the following weekly planetary chart that the XJO fell dramatically through both of the Saturn lines which last week were at 4693 and 4610 and has recovered substantially to currently sit at 4683.98 which is still below the upper Saturn line. These Saturn lines this week are now at 4694 and 4606 respectively.

    With the ASX200 futures anticipating an upward move of 5 points on Monday’s open the XJO will still be below that all important Saturn line at 4694.

     

    In the following two daily charts I have presented both a “corrective pattern” case and an “impulsive pattern” case to consider. Note that the upper boundary of the descending red channel is somewhere close to that Saturn line level. During its last rally the XJO fell a little short of the MBB. Currently the MBB is located at 4711. It is crucial for the bulls that this MBB level be breached with gusto.

     

    The impulsive case below shows 2 nested 1-2 patterns with a third 1-2 pattern started.

     

    The reason for mentioning both the corrective and impulsive cases is that two entirely different scenarios would unfold depending on which case proves to be correct.

    In the case of the corrective scenario, we would expect the XJO to move up for a period. We would expect this period to be in the order of 1 to 3 weeks.

    In the case of the impulsive scenario, we would expect that the XJO would commence a significant downward move in the coming weeks.

    The LOI whilst on a buy signal looks quite pathetic and likely to fail.

    At the shorter time frame the following 99 minute intraday chart shows that the LOI is on a strong buy signal but may be coming towards completion as the price action approaches the upper boundary of the descending channel. Note the UBB level of 4699.4 which once again is close to that Saturn line level.

     

    The following 60 minute intraday chart confirms the above view that the index may have a bit of a downturn in the near future. Note that the LOI appears to be starting to roll over.

     

    In the above chart I temporarily labeled the latest short term rally as a 4 wave move. I have assumed at this stage if that 4th wave has completed but Monday’s price action should confirm that view one way or the other. If the index happened to fall from existing price levels then the pattern could be a corrective move in which case another decline would be on the cards.

    SUMMARY

    During volatile times it is extremely difficult to predict market direction with any certainty. With the US market closed on Monday, the XJO will be left to define its own trajectory. Whilst I anticipate that volatility will continue I do expect that both markets will have an upward bias coming into the New Moon date of the 2nd June.

    As this will be my final Market Wrap for some time, I would like to wish all readers the best of luck with their investment decisions. Whilst it is only my view, I do anticipate difficulties in the coming year or two for share markets and hence would caution investors to monitor any share market investments very closely. Remember that the first rule of investing is to protect your capital. Unfortunately it is a lesson that many of us have to relearn from time to time.

     

     
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