What are we afraid of now?

For 3 days the Dow has powered to new highs while our market has headed south. Today we found out why. We are now afraid of a strong Aussie dollar. To quote Southern Cross Equities director Charlie Aitken "the strong A$ has significantly increased the risk of currency-related downgrades for industrials with high foreign earnings," Aitken said. "It's also outpacing commodity prices which is negative for our listed resource stocks." So because some company contracts are priced in US$ and the 'American peso' is getting weaker, the earnings of Aussie companies are also getting weaker when measured in Aussie dollars. Charlie says some of these companies will have to issue profit downgrades if the Aussie dollar keeps strenthening. Hmmm sounds like a fad to me - you know, something that's popular today but irrelevant tomorrow. However, if enough market participants believe something, well it will probably come to pass. So what to do? Well first thing is to forget about the news, its always late anyway and usually selective. I am focusing on the chart. The Elliot Wave picture continues to point to new highs, but if last week's low of 4869 on the All Ords is taken out, we can forget about new highs in the short term. It came perilously close to being breached today but did not. If the market does fall below 4869, I will personally look at taking out insurance against further declines as at that point the Elliot Wave picture will weaken and the XAO Indicator will probably turn red. A good indicator to watch is the stochastic (5,3,3). If the raw stochastic falls below 40, it is good reason to get a little nervous. The chart below shows just how close we are.

Odd behaviour but All Ords on track for further gains

In the past week, the Dow is up over 5%. In the same time, our market is not even up 2%. That seems odd. Will we eventually catch up or is the Dow on a frolic of its own which won't last? I wish I knew. What I can say is that despite the weakness of the past 2 days, our market has not closed the gap it formed on April 21. If that gap holds, we should soon follow the Dow to new highs. If the gap doesn't hold, we will need to reassess the situation. If last week's low fails to hold, the alarm will start to ring as that will likely turn the XAO Indicator red. For now, we are blue and optimistic.

Aussie dollar reaches minimum target of $1.08

I am keeping an eye on the Aussie dollar because I believe it has relevance for stocks. It reached the minimum projected target of $1.08 in very quick time. On an Elliott Wave projection, it would be quite normal for the move from March low (wave 5) to continue on to at least $1.15. This should be positive for our stock market although I admit I am starting to wonder and there are plenty of commentators out there who have the contrary view - that a strong dollar is negative for the stock market.

All Ords follows through

That was good follow through by the market today. I am particulary encouraged by the 'gap up' on the open and the gap then holding. At this stage we can expect the market to surpass the recent high at 5070 with the minimum target around 5280. There could be a test of sorts at about 5120.  Keep an eye on yesterday's high (4940). If the market were to 'close the gap' between yesterday's high and today's low, that would be the first sign that things are not as rosy as they currently appear to be.

Bullish reversal on All Ords

The correction of the last 7 trading days looks likely to have ended today with the appearance of a 'bullish reversal' signal. Yesterday's low should now hold for a move back to the recent high - and beyond. Yeterday's low also landed right on the 38% correction level of  the recent rally from the March low. Mark down yesterday's low - 4869 - it now needs to hold for the immediate bullish picture to remain in tact. By the way, the XAO Indicator remains positive.

All Ords falls below lower support level

Although the bullish picture on the All Ords is still valid (i.e. for a move up to 5050 and beyond), falling below 4890 today has caused some doubt to creep in. IMO the odds still favour a return to at least the recent highs in the near term but a fall below 4850 in the next couple of days would reduce those odds. A further fall below 4837 would probably mean we can forget about getting back above 5050 for the near term (next 3-4 weeks or so).

All Ords reaches upper support level

The All Ords closed Friday right on the upper level of the support range at around 4940 (see post of 12 April). The market should bounce here but whether the correction is finished is not yet clear. A further fall to around 4890 this week would still keep the bullish picture in tact but a drop below 4850 this week would be cause for concern.

'Dark Cloud' over Aussie Dollar

The dark cloud pattern is a major bearish reversal pattern in Japanese technical analysis. Composed of two opposite coloured candles, they are found next to each other after a defined or short term uptrend. The pattern is formed when a white candle is followed by a black candle that opens higher than the white candle's close and when the black candle closes below the mid-point of the white candle's body. This formation was formed by the price action on Monday and Tuesday. Today the pattern was confirmed by the lower high, low and close today. So we have a 'top' in place on the Aussie. Whether it is a 'big top' or a 'little top' remains to be seen. A 'little top' would see the correction stop at $1.02 or higher.

All Ords correction still 'normal', but Dow and dollar more negative

This correction still looks like 'normal' profit-taking, although the fact that today's high did not go above the mid-point of yesterday's range indicates that the All Ords will go lower before this correction is over. Of course if it moves lower it could develop into something else so we will keep close eye on things. Here's the chart showing an Elliott Wave count.

The chart for the Dow unfortunately is a bit scarier. There is divergence on both the weekly and daily RSIs.  If it makes a new low tonight, that would tell me the Dow correction has a bit in it yet. Whether that move down is brief or develops into something else remains to be seen. 

All Ords takes a breather

Today we saw a sharp reversal. This should only be a minor correction that finds support in the 4890 to 4940 area. The XAO Indicator remains blue and breaking yesterday's high of 5070 will indicate a resumption of the move up. So if you wanted to take out some 'insurance' (such as with options or minis) against this being the start of a larger move down, yesterday's high would be a good place for a stop (and if taken out, to buy that 'insurance' back). Minis are a new product which I have recently discovered. You can get more information here: https://au.citifirst.com/downloads/CitiMinis-Trading-Guide.pdf. The chart below is a candlestick chart of the All Ords showing the likely area of support.

Aussie dollar continues to point to higher stock prices

The dollar continues to 'lead' the stockmarket higher (refer to March 28 post). Elliott Wave projections are still pointing to a minimum target of $1.08 but anywhere up to $1.15 will be considered a 'normal' move from here. The continuing strength of the dollar augers well for the stockmarket. Eventually the market will take a breather. Where it does is anybody's guess but the higher the market goes, the higher the support level will probably move. Soon, the 5000 level, which for so long has been the ceiling for the market, might end up being the support. Here's an up to date chart for the dollar.

Incomplete Dark Cloud Cover

The Incomplete Dark Cloud Cover is a Japanese Candlestick pattern warning of a potential bearish reversal. It is a pattern that requires confirmation, so if you were being conservative, you would only use this pattern as a warning - not necessarily a pattern to be acted upon. The pattern is formed when a white candle (i.e. price action where the close is higher than the open) is followed by a black candle (close lower than open) that opens higher than the white candle's close and the black candle closes above the mid-point of the white candle's body. This type of pattern is common in uptrends. This pattern occurred today on the All Ords. The last time it occurred was on February 15 near the top of the market - see chart below. A move below the mid-point of the white candle (yesterday's price range) - around 5000 - would be a further warning. A move below yesterday's low (4988) would be bearish. Any move down now should only be a short term correction - well, until it develops into something else that is.

XAO Indicator turns blue

That was fast given the steep decline. Just 14 trading days from the low the XAO Indicator is blue agan. It is highly unusual for a market to rise faster than it falls, but that is precisely what we have just witnessed. This could mean the decline was an over reaction - understanable given what had occurred. The real question though is which was the over reaction - the decline or the rally following the decline? One concern I cannot shake is this. The earthquake in Japan occurred after the market closed on March 11. By that time the XAO Indicator was already red and the market had declined over 300 points from the high. It only fell another 160 after the news of the earthquake. So it wasn't the earthquake that triggered the decline. Something else was the cause. Was it Libya? Maybe, but that situation is not resolved, in fact its worse and the market is rising. Is there bad news in the wings? Ordinary folks will be the last to find out. All we can really do is watch the action and make sure we 'go with the flow'. Hopefully the XAO Indicator will help you do that.

XAO Indicator on the cusp of turning blue

The XAO Indicator is still red but only 'millimetres' away from turning positive. There have already been a couple of hints that this market was heading up again. One occurred on March 30 when the market rose above the low of March 2. That reduced the probability of a move back below the low of March 17. Then last Friday, the All Ords took out the March 4 high - that put the market on an upward bias. I am now expecting the market to continue on higher either right away or in the near future. The XAO Indicator turning blue will confirm that.

On the flip side, the current rally is almost the same as the rally in May-June 2010. That tells me that it might need a rest now or soon. This is reinforced by the 12-day RSI hitting 70. That level has caused corrections (up to 250 points) or at least a pause several times in the past year. Click chart to enlarge.