Elliott Wave and the XAO

There was a good study made last year about global debt problems. According to a February 2014 study by the McKinsey Global Institute, “Debt and (Not Much) Deleveraging,” total global debt is up 40% since 2007 to $199 trillion. As a percentage of GDP, “debt is now higher in most nations than it was before the crisis” of 2008/2009. On average globally, it is 286% now vs. 269% in 2007. I am sure those figures are much higher by now.

Despite the economic rebound since 2009, McKinsey found that the debt of households, corporations and especially governments continues to rise. “Governments in advanced economies have borrowed heavily to fund bailouts in the crisis and offset demand in the recession.”

McKinsey warns of potential risks created by the latest surge in debt. But the danger is far larger and more imminent than the report suggests, as evidenced by Exhibit 12 in the study, which is reproduced below. The table shows GDP growth projections as well as “additional growth needed to start deleveraging.” The graphic shows 13 countries’ projected growth rates and how much more they must grow to reach the point where their debt burdens are sustainable, that is, to reverse the debt balloon.
Unfortunately Australia is not included here.





Over the next five years, these countries would have to maintain an average growth rate of 3.3% just to be able to retire some debt. Of course, the very idea that anyone would reduce debt in a growing economy is a pipe dream.

Behavior during the latest recovery proves that today’s mindset is driving people toward maximum indebtedness given any excuse.

The only thing that will stop them is outright depression and a turn toward that is not far away. Despite historic central bank stimulus, many global economies are on the path to outright contraction, signaling a heightened danger to the global economy.

In April, “business activity weakened in China and Japan and slowed in Europe and the U.S., suggesting the global economy may be less robust than policymakers are predicting.” The official IMF forecast calls for global GDP growth to exceed 3%, but the IMF’s chief economist concedes, “the world’s potential growth rate could be shrinking.” The U.S. is supposed to be the “growth star,” but a series of weaker-than-expected economic reports appeared in April.

“The U.S. Economy hasn’t Disappointed Analysts This Much Since the Great Recession,” says a Bloomberg headline.

U.S. businesses are pulling in their horns.

In March, orders for business equipment fell for a seventh straight month and first quarter corporate fixed investment fell at a 2.5% annualized rate, the most since the end of 2009. Growth prospects are far weaker than economists will admit, and that reality is causing credit conditions to deteriorate markedly around the world.

There is more to say, but the bottom line is that all of this is happening in the light of rising stock market. In bull markets, rising stocks tend to drag economies behind them, and the further they rise, the stronger the fundamentals become.
Looks more like bear market rallies which tend to go on their own, leaving the economies on their own. Funny times.

WOW made a solid close below long term ascending trendline (on arithmetic scale).
When this kind of thing happens it signals that the historical trend is over and most likely scenario is that a new bear wave is developing. I am not sure about medium term subdivisons as from the Top WOW made 7 waves down. But if you switch on a weekly, the drop from 39 to 29 can be interpreted as the first wave down, then the second wave made a sharp rebound and the third is developing now.

Basically I am out, as situation is unclear. There was a good chance of rebound from ~28, it haven't materialized so there is no reason to be holding it here.
In a micro scale WOW just dropped in "five" so expect a rebound to ~28 in coming days, this could be a good point to take a principal from the market.
Next support shelf is around ~23 mark, so if the third wave is in the works, it should stop here. But the bottom line is that WOW entered a phase at which forecasting is a waste of time. It needs to sport some sort of recognizable pattern, thus it is better to wait for more waves.

It was pleasure to forecast waves in oil in the past 6 months. Todays structure unfortunately enters into a stage where there are an increased number of alternate scenarios due to the rise in Three Waves from the bottom.

The fact that both Impulsive waves (A) and (C) are almost equal in length and advanced within the parallel lines, makes the entire 5 mo rise look corrective. In this case I would expect OIL to drop below lower line(somewhere ~$60), and this would add to the bearish case which points to new lows below $46.
If line holds and OIL goes above recent high of ~70, we will not see new lows this year, and probably the year after as the bigger corrective pattern will take place instead.

In a smaller time frame there is a nice five wave decline, so after the short rebound OIl should collapse in a third(or C) wave bellow $64.

Having a look at the All Ords in terms of time studies. The following Medium Term Delta studies I used as a guide only. Taking the analysis at face value, it suggests we decline into the 3rd week of May, have bounce perhaps for a week and then the final cycle bottoms into 1st or second week of June at point 1 in between the vertical red and blue lines. This same cycle low ( point 1) historically as marked by green arrows was a low and pivot for the last 2 years in the 1st to 2nd week of June time period.

It should be noted that the cycle point number 14 shown by the blue arrows and in between the vertical green and red lines was a high in April for the last 2 years suggesting that this year we have a high in April too. That is how with high probability ( alongside other cycles tools) it was possible to forecast this turn with high probability weeks in advance. It should be noted that red points 15,16,1 are points in time and their position relative to the y axis is not being considered here.

There was quite an event recently about Chinese market Margin Debt levels, but they are not alone.
After lagging for a year, NYSE margin debt rose to a new all-time record of $476.3 billion in March. The lower line on the "Maxed Out?" chart from EWI below shows the level of free cash available to customers of NYSE member brokerage firms (inverted to show extremes against major stock peaks). The figure shows the aggregate balance in NYSE margin accounts once total margin credit is subtracted from cash accounts.





At negative $191 billion, the record high in total net debt is 48% higher than it was in 2000 and 240% higher than 2007.
So, contrary to the belief of at least some analysts, the use of credit in stock market accounts is as excessive as it has ever been.
These figures can go higher, but historically a Margin Debt indicator shows the highest borrowing near market Tops, indicating that the fear has vanished and people have a perception that debt is not a problem.

If All Ords reached a Primary degree top last month, this event should be confirmed by the five wave move down from it. Short term subdivisions shows that market is declining in "threes", so the only pattern that could emerge and be valid as an Impulsive wave is a Diagonal, in this case an Expanding one.

Chart below shows a preliminary path of the pattern. It just needs to rise and fall in corrective waves and be within the boundaries of the expanding Diagonal. Something other than that will invalidate the case so this current developing move up is quite important, because at this stage XAO from the Top cannot be considered as an Impluse Down.
Futures chart doesn't fit well into this scenario, so I'll be monitoring both to see what is happening and which one will sport an Impulsive wave down first(if any).





The reason to think that All Ords has toped month ago, is the big4 wave structures. All of them sported five waves down, with WBC (again) having the clearest subdivisions. This means that this drop from the top is part of the bigger wave down, and at least one more "five" should develop later.

WBC is fast approachig the bottom of fifth wave in the Triangle Apex resistance zone. I expect it to bottom out above $32 and then the corrective advance to push the stock higher 10-20% in the coming months, probably with $36 being the most likely target.

TTS just continued a sideways correction invalidating the case that this could still be a part of a third wave.
So I m going one degree higher and looking towards the Minor 4 instead of the Minuette 4 (as noted in last post about TTS).
Price action respects the upper breakout line sporting a higher lows. This leads to think that a Triangle could be developing and waves (d) and (e) should take a few more months to appear.
But the bottom line is that the Impulsive advance will follow after, Thrusting to ~4,5 area or higher. This is very high probability scenario as it is hard to find any bearish alternatives here-price moves in "threes" and higher, which is bullish.

Boggo said:

From here - https://www.aussiestockforums.com/f...=15355&page=22&p=868558&viewfull=1#post868558

Well that has been achieved, took a while though.
We are now in the turnaround zone (or are we ?).

Click to expand...

Back out of the the retracement area, hesitation as we approach 6000, then a break to above 6100 ????

(click to expand)

Hong Kong HSI needs to consolidate in fourth wave and then shoot higher to complete an Impulsive advance before the biggest correction since late 2014 begins.

Weekend reading.

Several articles have quoted bulls as saying that there is a huge amount of “sideline cash” available for investing, so the stock market will go up for years. I don’t say that it can’t, but certainly not for this reason. The idea of “sideline cash” is bogus on two bases.
Fundamentally there is no such thing as expansions or depletions of the amount of cash available for investing due to the accumulation or distribution of stock. The claim relies on the erroneous idea that the cash to buy stocks is somehow “used up”. But cash is merely the medium through which stocks are traded. The amount of cash in circulation is what it is. It doesn’t change because a buyer delivers his cash and because the seller receives his cash. It is still here. Any amount of cash in circulation can support a runaway bull market. All that need happen if for investors to keep exchanging stock at higher prices. If there were a total, of say, a million dollars in circulation, a stock selling at $100 a share could rise all the way up to $1000 and then to $10.000 and then to $1.000.000 and then to $5.000.000 a share with the final $4m of the value pledged as an IOU.

There is however, a flexible pile of cash that people have earmarked for investing, for example in brokerage accounts. This amount can change over time. Ned Davis Research (always a font of useful statistics) recently reported the fact that today the amount of cash sitting idly in brokerage accounts minus the amount of margin debt is at an all-time low. Also, something similar has been noted about money market funds: “as a share of the total market cap of the entire stock market, current money market fund assets are very low by historical standards, only 11,3%” (mark Hulbert, Market Watch, May 1) This is basically a bearish indicator for the stock market. Even so the total stock of cash doesn’t change because of these investors’ activity, and neither does the total stock of corporate shares.

What’s happened is that money previously earmarked for investment has been used buy stock, and stock prices have risen, pushing cash balances in money market funds to a lower percentage of the total value of stocks. This would be true even if the number of dollars in money market funds hadn’t changed, and it is true even though the total number of shares investors own has hardly changed. The key element of all these measures is not the using up of money or the accumulation of more stock. The key element is decisions by investors to trade stocks and money with each other in such a way as to push up the prices of stocks.

One can certainly claim that there is a lot of cash in existence. The FED has inflated the supply of dollars at a record rate since 2008, turning the government’s T-bonds into cash. But now the “sideline cash” argument is reduced to the same argument that the bulls in commodities and precious metals have used: The Fed has printed a lot of money. But this argument has failed to stop a seven year rout in commodities and a four year plunge in the price of gold and silver, so it hasn’t proved useful, either.

Davis also investigated household’s free liquidity, i.e., “non-equity liquid assets, net of liabilities”. He found that “as a percentage of the stock market’s total cap, this free liquidity stands at 39,8%. That’s not only lower than what was registered at the 2007 top, it is the lowest in 60 years with only one exception- the top of the Internet bubble.” This is the kind of indicator that is historically bearish for stocks as well. But is has nothing to do with a depletion of cash. There is more cash around than ever! What the figure means is that the cash held by the middle class in the US minus its debts, is low relative to stock prices. It is not a cash crunch, it is a stock mania compounded by a debt bubble.

Couple weeks on since the last short term update. I am not sure about All Ords count, so I use a parallel Indexes to determine what is going on. This post is more of a technical side, so anyone unfamiliar with the Wave Principle can find it difficult to understand and even boring.
On May 8th I posted a Financials chart that showed an incomplete Impulsive wave with one more new lows missing. It looked like this:




Well, there we are, I think this is it. Financials crashed in five waves down, pointing that a medium term trend is down. But before we get another wave lower, the sizable multimonth correction up should develop, retracing a part of most recent decline from the Top. It is worth to look at Big4 now for position trading.






It is quite challenging to determine a longer term trend in All Ords due to three wave rise from 2009 Bottom, but looking at it’s major drivers we can get a clue. I think CBA is a good example, which have also risen in three waves from 2009, just it stands now at All Time Highs. I posted a few quick thoughts about CBA here https://www.aussiestockforums.com/forums/showthread.php?t=736&p=868553&viewfull=1#post868553

I since snapped the idea and decided to look deeper whether there are any relationships between waves as the best numbers can point to wave structure in progress. I found that second scenario is more valid due to “right look” and because it has nice relationship between Impulsive waves (1) and (3).

In this case the proposed Wave (3) toped just a few points shy of 1,618 times the length of Wave (1), which is a common target for any wave 3. Also, market respects the Uper trend line, that started at the top of Wave (1) with a few touch points. Following this, the rise from 2009 is incomplete and needs wave (4) and (5) to complete the structure.

If Wave (4) is now in progress, the best Target would be at 38,2% retracement level of wave (3) at $76. CBA dropped in five from the top, as the Financial Index itself, so short term it should develop a multimonth correction up, and after another Impulsive wave to follow to $76. This scenario could take the rest of the year or even more, but when prices reach the lower channel line, it can be considered that wave (4) is over; or if Triangle is in works, its wave A extreme can mark the bottom of correction. Chart below shows the scenario graphically.






The CBA example doesn’t mean that All Ords can be counted the same as the constituents within are highly fractured. Small caps are almost near the bottom of 2009, midcaps are somewhere in the middle and large caps almost reached 2007 top if looked the charts from 2009.

But the opposite is true in a short term-Large stocks got heavily sold out from the most recent top, making important overlaps that are negating a case that this is a correction(it’s a new short term trend). Midcaps were somehow resistant to steep dives and Small Caps are even at new highs. Large caps are usually traded by Institutional and traders with experience, while small caps are a retail traders targets. Probably retail are thinking that there
are bargains everywhere and they just kept on buying those penny stocks.







My favourite stock to trade is WBC due to nice wave structures, presenting low risk entry/exit setups.
As other big4, WBC has a nice five wave decline and I would say it is either bottomed or Monday will bring one final wave to the mid $31. Using Fib relationships, wave 5 would be equal 1,328 times of wave 1 at ~$31,6.
Buying at these levels one could expect WBC to retrace some portion of the decline ranging between $35 and $37. But as the rise would be considered a correction, it could be a tough and volatile ride with market trying to push the time scale further instead of working on a price rise.

Continued...

This is the bigger picture of projected WBC path, based purely on CBA.





One more evidence that the market is turning short term can be seen in an hourly chart, where a small five wave advance developed last Friday. It can point to a bigger trend up lasting months, or it could be just a part of another small wave up sequence.
I can speculate on the short term subdivisions from the top, but if considered that each wave was a “Three”, the decline is indeed an Expanding Leading Diagonal which can be seen only when connected the extremes of the Motive waves and ignoring the extremes of Corrective ones. But it is highly speculative, and more based with the thought in mind that banks should rally soon, so a bit of wishful thinking was involved, please take this one with a grain of salt.





I had a nice few hour weekend writing, hopefully reading it was not boring,
Cheers

Banks turned as expected, with Westpac rising strongly from Wave (A) Bottom. This is only the start of the correction Up. But this post is more comodities oriented.

Here are couple charts of Iron Ore and BHP ploted on top, where you can see that BHP Toped out when Iron Ore was $60. And a mania driven by herding behaviour later (where Ore tripled) didn't even had enough power for BHP to surpass previous peak. That's the character of (B) Wave, when the underlying instrument lags perceived primary source of fuel for the rise.
Iron Ore technicals points strongly that wave (3) has bottomed. I expect Wave (4) to go as high as 75, and BHP to 40-45 in it's (D) Wave of Triangle.
Though the corelation is not very tight between the two, but commodities overal should drift afloat/up due to the correcting US Dollar, which is in Wave (4)(not shown). And as US Dollar is the primary barometer of Deflation forces in operation, it is pointing that the temporary relief has started.

Corrections tend to last to the point where the sentiment shift occurs, so when we start to see media reporting that we are "running out of oil" again, or "US Dollar will collapse soon" it would be over. Using Channeling Tehnique I project that final Wave in Iron Ore will commence next year and bottoms out the same year later +/- .
Based on the short term BHP structure, it is a Buy, but only if the last bottom of ~26 holds.

I'll throw in the chart of US Dollar which is the primary cause of deflation in commodities. Seeing that US Dollar will go up much further later, comodities markets are poised for more declines.

At the moment, Wave (4) is in Progress, that could take the form of Triangle, producing a Quassi Fractal followed lesser degree fourth wave. This is the primary expectation, though other forms of correction variables can develop.






At the Top of Wave (3) back in Jan-Feb, a 10-day average of a poll of currency traders (courtesy trade-futures.com) showed 93.7% dollar bulls, an all-time record high. Also, Large Speculators in futures and options, who are generally trend-followers, held an all-time record net-long position of 72,897 contracts, as shown on the chart below. The extreme in these measures shows the strength of the rally but also reflects a trend that is ripe for a correction, which is unfolding right now.
Wave (4) will be a multi-month pullback that alleviates the aforementioned sentiment extremes and sets up the dollar for another wave of advance, which drags comodities further down the road.

WBC, NAB and XAO. Both banks have nice structures, rising in five and correcting in threes. XAO looks the best when applied the same count as WBC-it retraced 50% of the advance from the bottom and ended in wave iv area, where corrections usually tend to end. Market can correct deeper, but if it does NAB can get hit with a technical damage, unless it holds above todays low resisting XAO further short term decline.

Today's crash most likely marked the bottom of wave (ii)(and lesser degree ii in NAB) . XAO even managed to advance in five later in the day, so a confidence towards further uptrend is high.

If the third wave (iii) is about to launch, it is normal to shake out majority out of the trend before it does, as third waves at all degrees rise the best "on empty", not with everyone on bard. The more people managed to get in at the bottom, the more series one's and two's market makes-like a sprinter ready to race but with some weight on his shoulders-shaking out few times before a big jump

Market tanked today, sending banks lower, but amazingly NAB managed to hold it's head above 33,23 yesterday's bottom, as expected. Westpac just made another "three", declining in 7 waves, which is normal, the same with All Ords. If the next leg of advance is about to start, it should start soon, probably tomorrow. Otherwise short term expectations will change.
As I write futures are at 5610, 0,7% lower than the All Ords closed today. Basicaly futures have to manage their way up through the night or we have a gap down tomorrow at open which could take out previous lows, making the move bearish.
I do not like to trade or analyse short term moves, but this is the opportunity, so I am watching it closely, especially when I sit on a pile of cash.







By the way, Ending Diagonal in the DJIA looks complete, just it is short in time and the shape doesn't look very nice. It can be a part of even bigger ED, that could develop in the months to come, but ultimately it should end with a crash.
I see just one problem with it-in the opposite way to the previous ED, which was "silent" and little people saw it, this Ending Diagonal start to make a noise in the blogosphere. It needs to appear in the Bloomberg or CNBC analysis and consider the pattern is killed. So be cautions about this one as a bearish pattern.






And for those bears out there-this one hasn't even run half way through:

(I'll have a comprehensive analysis on most Asian Indices later.)

Both banks discused above at this stage have new lows, leaving previous advances as a correction.
Until new Impulsive advance develops, situation short term becomes unclear and thus we need to wait for more waves that will resolve this.
This doesn't mean NAB will not rise as I discused, in fact, the patterns with new lows looks even more bullish than before.

It's been a while since my last post and I hoped that situation in All Ords would resolve itself by now, but it just kept on going. Each time XAO declined in 5's (short term), the rebound was minimum, meaning a weak market. Even banks I follow(WBC and NAB) had very small corrections up, instead of unticipated multimonth rallies.

Though momentum Indicators such as RSI shows divergences in XAO, but the declines in world markets and cracking DJIA Ending Diagonal with crashing Transports along with Utilities suggests that something else is unfolding.

All Ords waves are mess since 2012. Both at Minor and Intermediate degree ( with a few exceptions) anyone can count a myriad bullish and bearish scenarios and try to apply guidelines as one wish.

But after browsing through many instruments I found one particular ETF that has produced excellent Wave Structures since 2009.
The ASX 50 index ETF since 2012 bottom advanced clearly in 5 Waves. Also, this advance is Fibonacci related by 1,236 multiples of Wave since 2009. And it ended at the upper Channel line.
Those are the guidelines of the corrective 5-3-5 retracement.

Based on this it would be nice to see a 5 wave move down to confirm all the above I noted. It can be a simple Impulsive decline or Leading Diagonal(Expanding or Contracting), and it could find support somewhere below the middle channel line. This would be an extremely bearish development, pointing for much lower prices later.

But If this 5 wave decline does not materializes this year and from current levels and ASX50 jumps above the Uper Trendline (in this case above 60), I consider this a bullish development, which most likely carry SFY above 2007 highs.

Qverall, the picture in SFY looks like a loud warning.

The decline from wave 2 top to the current levels already looks like ending, as subdivisions finally start to take form of five. It could make a few squiggles down in the coming days, but the bottom of this decline is very close.

The rally that starts from here would be important, as market sits on the three wave decline from the March top, making it corrective. If rally falls short, the most likely scenario is that the Point of Recognition is ahead, confirming a bearish scenario discussed yesterday-means a larger five wave decline is developing.

However, if prices manage to breach wave 2 top( as a Key level on the chart), most likely a Leading Diagonal would be at works, with its first wave already over at these levels. As always, wave subdivisions would be important for determining the highest probability scenario.

I am getting bored already.

Here is one good chart indicating that the entire Asian Pacific region sits at the crossroads.
It has excellent wave structure which is pointing at the upcoming trigger that will determine the trend for the next few years.
From 2008 bottom Index advanced in clear five, later after correction it just kept on going in overlapping manner, which at this stage can be considered as an Ending Diagonal, or series one's and two's.

If the trend remains bullish, market should bounce back from the lower trend line again, but this time producing big monthly bars (like in 2009-10), which would indicate that the strongest advance from 2009 lows has started as a third wave.

For a bearish case all we need to see is the break down of the trend line from 2008 low, leaving the entire structure as 5-3-5 and the retest of GFC lows will follow in the years to come.

And because now this index is sitting very close near the trendline mentioned, All Ords short term direction basically says the same thing. If market tanks below yesterdays lows (as per my chart in yesterdays post) producing Point Of Recognition-at the same time Asian Pacific Index will break the lower trendline. So this is the event to look for in the coming month.