Could this be a replay of 2007?

In August 2007, the market got a massive shock with the All Ords crashing almost 1000 points (15%) in just 24 days. But then just as spectacularly, over the next 27 days it had taken out the July high and 26 days after that it had reached the all time high of 6873. After that we saw one of the most bruising crashes in history. The first chart below shows the move down and back up to the November 07 high.

In March 2011, the market also had a big shock tumbling almost 500 points (9.5%) in 21 days. 9 days later it had rallied just as sharply as it did in late 07 and was only 100 points from where it started at the February high. Could this market go on just as it did in 2007 only to find a nasty surprise just around the corner? So far the moves down and up seems quite similar. By the way, the XAO Indicator remains red.

Dollar needs to clear $1.025

There is much resistance for the Aussie Dollar at around the current level ($1.02). If it can break through convincingly, then I think it has much further to run - I am going to stick my neck out and say $1.08 would be the minimum target. Why the focus on the AUD? Mainly because a rising dollar usually means stocks will also rise. At the moment the stockmarket is not clear on what it wants to do. The move by the dollar could be giving us a clue. That said, I will be taking my cue from the XAO Indicator, while it remains red, I will remain cautious. Here's the Dollar chart. Click the chart to enlarge.

New lows looking less likely

The likelihood of the All Ords making a new low (i.e. below the March 17 low) in the short term is diminishing. If the All Ords rises above 4877 (which is the low of March 2), I would say new lows will be unlikely. Rising above the March 2 low will increase the likelihood that this market will move into a sideways consolidation phase. IMO this remains a cautious market. The XAO Indicator of course remains red. Here's the chart.

Moment of truth for the Aussie dollar

The dollar has fallen sharply out of an upsloping wedge which is usually very bearish. It then rallied sharply for 3 days right back to the underside of the trendline - not an uncommon reaction. And here we are. It looks like the dollar's moment of truth. Will it keep going up and resume the long term uptrend which should be good for stocks? Or will it fall away from here? That will probably be bad for stocks. We should know soon enough. Keeping an eye on the dollar should give us a clue as what the stockmarket it likely to do. Here's the chart. Click chart to enlarge

XAO Indicator is based on time and price

For the XAO Indicator to turn blue again quickly the All Ords will need to rally sharply back to around 5000 although as time passes, the price level at which the indicator will turn blue will fall. At this stage I am not expecting the indicator to turn blue anytime soon. This does not of course mean the market cannot maintain a upward slope because it can just don't expect the XAO Indicator to be supporting that move with blue bars.

The XAO Indicator is not a 'predictive' indicator - it does not tell us what is going to happen - it can only tell us what is happening right now. More often than not, what is happening right now can last for a while. That's what I like about this indicator - it keeps me 'in the moment'. Sometimes the 'moments' change quickly like they did in August 2010. More often though the moments last for months just like the last one from September '10 to March '11. During such moments, good profits can be made. During the rare, long red moments, the indicator keeps you out of the market thus avoiding a 'GFC type' event. Here's today's chart which shows the 50% retracement level currently providing support.

Lower prices still on the cards

At this stage, in my opinion, the All Ords will go lower - perhaps significantly. The chart below which comes from the Advanced Get software, shows a 'PTI' of 65. When this number is above 35 it says the move down is playing out as it should and the correction (of the past couple of days) is normal for the move. This means that soon the down move should resume. The other thing is that if the move from the high was only a corrrection then I would have liked it to stop at the wave 4 of the previous move up - around 4665. I continue to think the likely outcome is that we will retest the 2010 lows of around 4200 on the All Ords although we may not reach that until May. A break below 4500 will increase the likelihood that the 4200 level is the minimum target, so I am not rushing out to re-enter the market. A word of caution - markets are dynamic and can change very quickly. A couple more strong up days could change everything and turn this market positive again. Will keep you posted.

Is Aussie dollar's run over - for now?

It certainly looks like it from the charts. The daily chart - the first one, shows a simple, neat Elliott Wave count which ends with a convincing break to the downside from an up-sloping wedge. The second chart is the weekly which shows the move from the 2008 lows. It looks even neater and ends right on the resistance level predicted by the software. Is a falling Aussie dollar bad news for Aussie shares? Usually it is. The good news is that a falling dollar probably means the market is expecting some rate cuts.

The Ides of March

     On his way to the Theatre of Pompey (where he would later be assassinated), Julius Caesar saw a seer who had previously foretold that harm would come to him not later than the Ides of March (15 March by the Roman calendar). Caesar joked, "Well, the Ides of March have come", to which the seer replied "Ay, they have come, but they are not gone."
     To my mind the XAO Indicator is a little like the seer. It foretold of the danger ahead. Investors that failed to heed the warning would have been "assassinated" in the past couple of days and I can't help feeling that the final words of the seer may also be relevant in this market: "Ay, the Ides have come, but they are not gone."
     In plain English, what I am saying is this. It is tempting on these panic days to go "bargain hunting" (and I must admit to doing that a bit today - but only a bit) but the wise course would be to assume that the worst is not yet over. Often these panics move in a basic Elliott Wave pattern. If that is right we might only be 50-60% of the way down from the February high. That would mean testing the 2010 lows of around 4200 on the All Ords.
    In any event "crystal ball gazing" is not really necessary - and probably dangerous. If we patiently wait for the XAO Indicator to turn blue again, in my experience there will be ample time to jump on board the next rally. This way you will avoid the heartache of getting in too early and regretting it later.
   Below is today's chart. I have also drawn in the Fibonacci retracement levels from the May 2010 low to the Feb 2011 high. What's interesting is that yesterday the market closed right on the 38.2% retracement level and today it closed right on the 50% retracement level. It looks like it is searching for support but will it find it? The next common support level is the 61.8% level at 4516. Will it close there tomorrow and make it three out of three?

What can we expect now?

     The chart below highlights the last 2 times the RSI (12 day) fell below 25 on the All Ords chart. In January 2010, the market fell another 100 points before making the low about a week and half later. In early May 2010, the market fell a further 500 points before making the final low. That move took another two and half weeks.
     So which situation do we have this time? Well I always say, its difficult to predict anything let alone the future! But there is an astrologer who comments on the market from time to time that I sometimes check on. He says that astrologically speaking the 28th and 29th of March are the times to watch. If he is right, this decline may have another few hundred points to go - at least. That's another 5-10%. Knock that off your portfolio and you will know what to expect.

We're now in the 'red zone'

     The XAO Indicator turned well and truly red today. We are now in what I call the 'red zone'. This does not necessarily mean the market will fall further - on 25/8/10 the first red bar was actually the lowest and the market rallied from there - but that is the exception not the rule.
     What the 'red zone' does mean though is that the market is now at risk of falling further. There are only 2 ways to avoid a large fall, one is to sell out and the other is to hold lots of put options. If you don't know how options work, well then, they're not an option for you. If you own stocks on margin, now is the time to think about how to handle a margin call.
     This is how the XAO Indicator can help - by sounding the warning bell so that you can prepare. I myself am now only 40% invested and 60% cash plus I am holding puts for further protection. I am very cautious by nature and very reluctant to hand back to the market well earned gains - even if I end up missing the start of the next rally.
     I have thoroughy researched the way stocks behave when the XAO Indicator is red (and blue for that matter) so I have a fair idea about it. You too can do the research - I have given the dates of change in the Indicator going back over 10 years. You will find that information to the left of this post.
     Below I have posted 2 charts, both of the All Ords. One is for the past 12 months. The other is for for the past 3 years to give a longer term perspective.

Still blue but only just

The XAO Indicator is still blue but only just. Only a small decline tomorrow will probably change it to red. Here's the chart.

XAO Indicator still blue

XAO Indicator remains blue after today's action. Here's today's chart. Is there any similarity between current price action and the price movement of late November/early December? Hmmm, maybe not. Something else - the price hanging on to the trendline by its absoute fingertips looks positively scary but I guess that its at the turning points that things look the worst. We'll see.

XAO Indicator still positive

A brief update. The XAO Indicator is still blue but a fall below about 4850 will turn the indicator red. Will keep you posted.

All Ords falls below trendline but XAO Indicator still positive

The All Ords has closed below trendline support - on an arithmetic scale chart. On a semi-log scale chart it is not as bad but is barely holding the trendline. The XAO Indicator though, has remained positive. But, if it falls another 50 points or so, it will change to negative. Will keep you informed. Here's today's chart.