In last week’s Market Wrap I suggested the following:
“Whilst the sentiment in the market has been extremely negative in recent times and in spite of the fact that lows often come near the Full Moon dates, the indications are that we may be heading into a positive period in the coming week for both the US and Australian markets.”
What actually happened was that the XJO closed down 0.67% and the S&P500 closed down 0.18% from last Friday’s close. So in spite of what appeared to be slightly positive leads from various technical indicators the New Moon to First Quarter lunar phase ran true to its statistical average and had a neutral to slightly negative influence. Statistically the First Quarter to Full Moon period is strongly negative which is why the Full Moon period often leads to significant lows in market cycles.
The Full Moon date this month is the 17th May so we can expect that the low of the market cycles in both the US and Australian markets will probably find their intermediate cycle bottoms. This lines up with a number of other cycle studies. As has often been stated in this market wrap, in cycles analysis slippage is common hence the most accurate suggestion that I could make is that our two indices either have already bottomed out or are about to within the next few days.
THE BIG PICTURE FOR THE S&P500
As I believe that we are arriving at a significant part of the market cycle in the US market I thought that it was appropriate to have a big picture view of where I believe we current sit in the larger time frame cycle.
We can see from the above chart that I believe that we are very close to completing Primary level wave Circle B. At this stage G4 still believe that this will occur sometime within the next 2~4 weeks. The reason for the time frame starting at 2 weeks is because the last rally in this cycle only took 9 trading days to complete.
The chart below is the 99 minute intraday chart of the S&P500. We can see that it continues to trade within a rising medium term channel. The current short term price action has a contracting wedge forming which can cause a break out in either direction at this stage. I would suggest that the medium term direction of this index is up but it may still have a bit more downside early next week before commencing the next rally.
We can see that since the low of 1249.05, the index has had two rally legs that took it to the upper boundary of the rising channel. G4 anticipate that the index will move up in a final rally in an attempt to once again reach the upper boundary of the rising channel. It is our view that this will be the last rally of the Primary Circle B rally that started back in March 2009 !!!
Now if we assume that the first rally in the above chart was a wave 1 and the second rally in the above chart was a wave 3 then from Elliott Wave principles we know that the coming wave will be a wave 5. Now under the Elliot Wave rules, wave 3 cannot be the shortest wave. “Since wave 1 was larger than wave 3 then wave 5 cannot be greater than wave 3”. Wave 1 had a range of 90.41 points and took 17 trading days to complete. Wave 3 had a range of 75.88 points and took 9 trading days to complete.
If we make the assumption that wave 4 has already completed at 1329.17 then the absolute maximum level that wave 5 can reach is 1329.17 plus 75.87 (ie 0.01 point smaller than wave 3) which equals 1405.4!
The above 99 minute intraday chart currently has the LBB sitting at 1332.59 and the the 60 minute intraday chart has the LBB sitting at 1332.96. If these levels hold then the abovementioned low of 1329.17 will remain in place.
If on the other hand there still are 2 or 3 days of further down moves then the 1405.4 level cannot be reached because we still need to obey the EW rule that the third wave cannot be the shortest wave. I think it would be safe to say the target zone for the last rally is likely to be between the previous high of 1370.58 and 1405.4.
We can see from the following Weekly S&P500 planetary chart that there is a strong support level being provided by the Saturn line at 1335. For the last 3 weeks the index has been unable to close below that line (based purely on the weekly bars).
If it does happen to be breached to the down side then the Neptune line at 1320 becomes the new support level for the index.
The lead from Wall Street currently has the ASX200 futures contract suggesting a drop of 35 points on Monday’s open. The ADRs on the NYSE had BHP down 1.81%, RIO down 2.17% and WBC down1.21% thus confirming the negative outlook for the Australian market.
The 99 minute intraday chart below shows an index that is in retrace mode. The LOI is still on a sell signal and the anticipated 35 point drop on Monday’s open will continue that trend.
We can see that there are a couple of potential bounce levels at the 61.8% and 76/4% Fibonacci retracement levels of 4668 and 4595 respectively. As the XJO closed on Friday at 4711.36 a drop of 35 point would take it to the 4676.36 level some 8 points short of the 61.8% Fibonacci level. For this reason I suspect that we will drop more than the anticipated 35 points on Monday.
We can see on the XJO planetary chart that the Saturn line at 4690 played an important role in providing support for the XJO during the last week. With the XJO expected to fall below this level on Monday morning it is extremely important for the index to be able to recover that Saturn line prior to market close or it will run the risk of falling further to the 4610 Saturn line.
If the average First Quarter to Full Moon lunar phase comes into play then the drop to the 4610 level is quite on the cards.
THE BIG PICTURE FOR THE XJO
Whereas the S&P500 has quite a high probability of making a new high the future for the XJO is not as bright. With a drop down to the 4600 level being highly likely it would require a rally of over 9% to even get close to the previous high of 2025.1 made in April 2010.
With the weakness that has been displayed in the index since that time it seems improbable that it will be able to accomplish this task. If it can get close to that level, we can see from the chart below that the 50% Fibonacci level at 4986 is a formidable overhead resistance level.
THE US DOLLAR
I have mentioned on a number of occasions in past Market Wraps that much of the rise in commodity prices and US equity indices was due to the devaluation of the US dollar caused by Bernanke’s money printing practices. With the promise (or is it a threat) of this practice coming to an end in the near future there was bound to be a loss of momentum in the rate of fall of the US dollar.
We can see from the following chart of the USD that it recently bounced off the LBB on significant volume. In fact that it can be seen that the volume had increased substantially during the basing period of the USD cycle.
We can see that the W%R indicator has started trending upwards and whilst the possibility of another test of the recent low is likely, the chart is indicating that the likelihood of the USD going into a significant rally is increasing significantly. That would significantly increase the chances of falling commodity and equity prices and may have signalled that the AUD may fall further in the medium term.
The US market is poised to either bounce from existing levels or have a bit more of a move down before commencing the rally that investors have been patiently waiting for during the last couple of weeks. G4 do expect that if the bottom is not in already then it soon will be. Where the market will be by the end of the week relative to Monday’s market open will depend on the anticipated bounce.
For the Australian market we anticipate that there will be a negative start to the week but the cycle should bottom by mid week with a move up commencing from that time.