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Page last updated Tuesday, 15 December 2009
Equities Bulletin - Issue 52 : January 2010
The Outlook for the ASX 200
By Daniel Goulding
My favoured short-term count for the benchmark Aussie equities index, the S&P/ASX 200 (XJO) is presented below in Figure 1.
Figure 1: Weekly Chart of the XJO (Log scale)
Source: IRESS
The weekly chart depicts an expanding triangle, kicking off in November 2008. An expanding triangle is a corrective pattern that consists of five legs, denoted A-B-C-D-E. Figure 2 presents the various interpretations of this pattern according to the different schools of thought with respect to Elliott Wave.
The expanding triangle as I have counted it above, displays what is called Neowave Reverse Alteration (the Neowave school was founded by Glenn Neely in light of his significant theoretical extensions to the original theory of Ralph Elliott), where wave D is smaller than Wave B in price, reversing the common relationship between these two legs. As a result, wave D will also be smaller than Wave C, so that the trendlines containing the triangle converge rather than expand as per a ‘vanilla’ expanding triangle. Such a configuration is not permissible according to the Classical school (a term I use to denote the body of knowledge that remains predominantly consistent with the original teachings of Ralph Elliott) where wave D must always exceed wave C in price.
If the expanding triangle is a valid interpretation of reality, a break of the green line on the weekly chart will provide confirmation that the expanding triangle has completed. Upon completion I would expect to see a downturn push the market towards 4100ish initially. The nature of this decent and the inevitable bounce/rally from this level will provide more clues as to the expected evolution of the market going forward. Unfortunately, because expanding triangles usually unfold within protracted complex corrections, a number of alternatives exist with respect to the future. Regardless of how the future unfolds, volatility will remain a key theme going forward. And I continue to expect that the market will retest the March low in due course.
I have seen some Elliott scenarios where the March 2009 low, rather than the November 2008 low, is counted as the bottom of Wave A in this bear market. In my opinion, these counts are unsatisfactory. According to my technical work, both sentiment and the market internals bottomed in the vicinity of the November 2008 low. Last but not least, the January 2009 to March 2009 decline was more laborious than the November 2008 to January 2009 rally. As a rule of thumb, momentum usually sides with the prevailing trend making it unlikely that March was an important low in terms of market psychology.
In the event an expanding triangle is incorrect, the price structure is nevertheless not amiable to a new bull market kicking off in March in its current form. Impulse waves sport little or no overlapping and they tend to show at least some hint of acceleration through the middle of wave 3. Deceleration rather than acceleration is evident in the move off the March low. And there is a plethora of overlapping. Both conditions rule out categorically that a bull market kicked off in March 2009.
We must remain cognisant of the fact however that Elliott Wave is the quantification of the collective mood. Bear markets do not necessarily terminate at the price low. According to Glenn Neely, psychological and price extremes only equate in approximately half of all cases. In those other instances, the uptrend or downtrend will terminate at a lower high or higher low respectively. So even though a new bull market is unlikely to commence for a number of years yet, it is not a strict prerequisite that new lows should be witnessed even though I favour this outcome. In the event the March 2009 low holds as the price low of this bear campaign, it is a harbinger of a significant bull market starting sometime next decade.