XAO Short term action

There's several Elliot Wave interpretations for the short term Australian All Ordinaries as of the close today. The wave structure hasn't broken down as anticipated in an aggressive manner, thus, caution is required until clarity on the wave structures is available. The use of channel lines provides guidance in the short term for potential upside stops.

For wave (ii), either it has completed and another subdivision is unfolding (in waves 'i' and 'ii') or a flat is occurring for wave (ii) which can see further upside to around the 4523 level. Once complete, a series of wave 2's would have completed and the XAO downside aggression should commence.

S&P500 ready for a break to the downside?

It is anticipated that the S&P500 is preparing for a break to the downside over the coming weeks as wave '3' gets underway. A down sloping channel in green provides strict guidance for the upside boundary - a confident break above the top channel line will indicate that the alternative count is most likely unfolding and bring scrutiny for wave 'B' circle.

For the primary count, Wave '2' is considered complete as a flat correction (evident for wave 2's), and thus, strict guidance on how the wave structure must unfold downwards must be observed. This means the index must unfold to the downside in a series of fives waves - aggressively. However, the short term shows some upside potential as the the first small five waves down appears complete.

XAO - The bigger picture

The Bigger Picture of a Zig-Zag correction on the Australian All Ordinaries

A few posts back I provided a long term chart of the XAO that covered the last 120+ years, one key point shown was the clear break from the very long term trend line from 1975 onwards. This date and one other - 1987, are two key dates on the chart that represent wave 4's of different degrees of trend. I'll come back to the importance of these dates later.

The first assumption on the chart below is that a zig-zag (5-3-5) correction is unfolding on the XAO  on such a scale that hasn't been seen in decades and probably won't be seen again in anyone's lifetime. Supporting this outlook is an initial 5 waves down from the 2007 top completed in March 2009 - labeled as 'A' circle. This is an ominous sign as 5 waves down requires another 5 down to complete a corrective phase.

'B' circle is assumed complete and is a 3 wave correction, leaving wave 'C' circle down to unfold.

The downside targets of wave 'C' circle are shown on the linear scale chart below. Several downside targets are represented - with 1261 being the wave '4' triangle correction in 1987-1992 and an extreme target that represents the wave '4' of next higher degree from 1975 (Corrections will usually aim to complete in the vicinity of a previous wave '4' or further)

1975 was the start of the most aggressive leg of the credit era and there is strong belief by a few analysts that this credit era needs to unwind - aggressively. Unwinding of the XAO back to the century long trend line would see the XAO at around 1000-1200 points, or in other words the 1987 wave '4'. 

More sideways on the XAO?

The Australian All Ordinaries appears to still be unfolding sideways with wave (ii) of '3' and I suspect a small push upwards may be needed to complete (ii).

The real question is whether the Labor or Liberal party will win tomorrow's election.  The outcome will not affect the market, but there is a high possibility that Labor will retain leadership as the social mood in Australia is not at a extreme low to warrant a change of Government. Labor did undertake a dumping of prime minister Rudd to avoid losing on election day - a very good strategy in hindsight which seems to have brought stability to the party.

In bear markets, Governments typically aim for more control, grow much larger, budgets are wasted on stimulus (same as in 1929), new ways to collect more tax credits is sought and misleading the public to drive change are typical attributes. These can all be witnessed today in both sides of politics in Australia.

The worst possible outcome is to allow either party a majority in the senate. A Labor/Green alliance would give unprecedented control to the Government and Australia would see the introduction of aggressive 'green' laws, a Carbon Pollution Reduction Scheme and most likely a revisit of the Copenhagen treaty which is a demonstrated front for a World Government - The very attributes of control which occurs in recessions/depressions.

XAO Very Short Term Action

The very short term XAO wave count is at a critical point which could see the index roll over to the downside in the next couple of trading days.

Wave 2 Complete

In the last update, the XAO needed a little sideways action to complete a small wave '4' and then a push up to finish wave (c). This has occurred precisely as described and the expectation is for further declines. 

Since Wave '2' is now complete, the XAO must continue to lower levels with aggression for wave '3'. If this 'aggression' does not materialize, then this should be a warning for a period of uncertainty. A confident break below the end of wave (b) in less time than wave (c) took to develop will provide strong supportive evidence that wave '3' is underway.

 

XAO still Trending Sideways

In the last medium term post discussing  Wave 2, there was potential for further sideways action. I believe that this is currently the case and a set of very strict conditions has been imposed on the unfolding wave '2'. Under a flat correction, the final wave (c) must be a 5 wave thrust to complete the large wave '2' correction .

As the chart below is already two days old, there has been sideways action for the unfolding small wave '4' of wave (c). Once complete, another small push upwards is needed for wave '2' completion. If this count is flawed, then we'll know very quickly.