So far so good but bigger trend is still down

The odds are increasing that we have seen the bottom of the market but we can't lose sight of the fact that we are in a solid down trend. The ellipses shown on the chart below show the potential resistance levels for the current rally (about 4850 on XJO XAO (apologies)). They accurately predicted the top of the most recent rally on May 19 (see post of that day). In fact the ellipses are regularly accurate. There's a saying "the trend is your friend - except at the end". So the ellipses should continue to be accurate except when the trend is changing.  I have mixed feelings about this market. The gut tells me that we have seen the worst but the mind forces me to look at the chart and it points to one more attempt at the recent low. For now we will enjoy this little ride and keep both eyes open for a potential brick wall ahead.

Searching for a trend change

The stockmarket has reversed its daily trend but until the weekly chart makes a reversal pattern, the main trend remains down. All major stockmarkets show a similar short term pattern - i.e. the potential of a trend change but none have confirmation from weekly charts. The exception is the Canadian stock market. It's weekly chart turned up two week's ago and last week continued the upward trend. That's good news for our commodities laden market. So is the weekly chart of the CRB Index which made a reversal pattern last week - see chart below.

Reversal pattern forms on All Ords

The market formed a neat reversal pattern today - a variation of the candlestick Piercing Line pattern. What is particularly attractive about the pattern is that today's close exceeded the highs of the past 2 days - and pushed above the pivot low formed on 16 May. A close tomorrow above today's high would confirm we have some kind of bottom in place. A danger sign would be the market falling below today's low. Taking out yesterday's low would be downright bearish. Let's see if we can build some sort of rally from here.

Market resembles May 2010

Today the market resumed its decline just as I feared in my last post. The question now is where will it end? The market action so far from last week's low bears an uncanny resemblance to the market action in May 2010 - especially in the week following the low formed on 7 May 2010. If the similarity continues, we can expect two things. The bad news (for the bulls) is that we can expect lower prices - maybe substantially lower. The good news is that if we follow May 2010, then a significant low could come at the end of this week. If we do get a low, we should also get a reversal pattern. If I see one, I will let you know.

Oops, market stalls at first resistance

It took a 'bullish harami' to turn around the recent decline and now after only 3 days of advances, a 'bearish harami' (inside day) threatens to stop this little rally in its tracks. If the All Ords closes below today's low on Monday, I'm afraid that we will need to treat that as a resumption of the decline. New lows would not be out of the question if today's low is breached. My guess for a target is around 4690. If today's low holds and the market closes on Monday above today's high, then most likely the market will keep moving higher.

To illustrate my point I am posting 2 charts, one is the current chart of the All Ords and the other shows the All Ords as it stood on 31 August 2010. In both charts the decline was stopped by an 'inside bar' - a 'bullish harami'. In both charts, the bullish harami was confirmed the next day. In both charts, the market rallied for 3 days and then formed a bearish harami on the 4th day. On 1 September 2010, the market powered on up after taking out the high of the inside bar. This time I think it will be different mainly because in September 2010 the rally took out the previous pivot low (shown by blue arrows) but this time it hasn't. Also this time we are in a more significant downtrend (as illustrated by the red bars). By the way, if the market does fall, it could coincide with a timing prediction I saw recently which pointed to a May 26 low. Well, we will find out soon enough. Click chart to enlarge.

US market confirms reversal

The S&P500 futures produced a clear reversal pattern last night - a 'three river morning star' candlestick pattern. It is composed of a white and black candle with a star between them. See diagram to the left which also shows the past three days price movement on the S&P. This signal is usually very bullish so its reasonable to expect at least some follow through.

Our own market followed through nicely today, but the thing to remember is we are still in a downtrend (XAO Indicator is red) so we should probably continue to view this as a bear market rally. That rally has now reached the first resistance level. The next one is at around 4890. If I see signs of the rally becoming exhausted I will endeavour to post about them here. 

All Ords shows signs of a rally but not the Dow . . . yet

The All Ords has finally made a reversal pattern. In Japanese Candlestick language it is called a 'Bullish Harami'. In our language it is called an 'inside bar' - that was yesterday (a lower high and higher low than the previous day, preferably both a lower open and close than the prevous day's open and close). The confirmation of the potentially bullish reversal came today when yesterday's high was surpasssed. The market should now rally but a fall below 4718 (Monday's low) would spell further trouble.

The 'Big Aussie' (BHP) also made a reversal pattern yesterday and confirmed it today. In 'Western' technical analysis it is called an island reversal (apparantly gets its name from the analogy of a boat reaching an island, unloading quickly and leaving immediately). BHP's reversal pattern is more persuasive but of course nothing is guaranteed. See chart below.

However the Dow has yet to make a reversal formation. That may come tonight. We don't always get a nice, neat reversal pattern at turning points so the US market could possibly rally without one but I would be a lot more confident of our market if the US also makes such a pattern.

Trend is down but a bounce is due

Having now retraced 61.8% of the rally from the March low to the April high, a bounce seems due. The stochastic is rising and the 61.8% level often provides good support. Friday's price action also tells me there is some interest in a rally starting at this level. It's risky trying to pick a bottom, but if we can hold Friday's low on the All Ords (4754), we could see more buyers coming in and taking this market higher - probably back to at least 4900. A close above Friday's high would confirm that view. However, any rally should probably continue to be seen as a selling opportunity - that is until we see some serious evidence that this correction is over.

All Ords tries to form a low . . . but

It was a good try today - by the market to form a low, but I am not convinced that we will see a rally of substance from here. As mentioned in yesterday's post, the XAO Indicator is red. Only 4 times in the past 23 years has the XAO Indicator failed to move lower after first turning red and it has turned red over 50 times in that time. So, I don't like the odds of today's low turning out to be a significant low. From a Japanese candlestick perspective, it is important that the All Ords closed today above the mid-point of yesterday's range. That mid-point was around 4828 which is about 1 point below today's actual close - so we made it by just 1 point. As I said, the market is trying but it's not convincing. If we are going to advance from here, it is important that today's low is not breached (4790). If it is taken out it is highly likely we will continue to see lower prices. On balance, I think we should view any rally from here as likely to be short lived.

'El momento de la verdad' for the stockmarket

The Spanish phrase el momento de la verdad refers to that gruesome moment just before the final sword is thrust into the bull during a bullfight. It literally translates as 'the moment of truth' and has come to represent a deciding instant, when it becomes apparent whether something will succeed or fail. I think we have now reached such a point in the market. It has fallen straight through the usual supports in the current decline from the April high and today reached the 50% retracement level. The XAO Indicator has turned red and if the All Ords falls just another 45 points to under 4770, the Elliott Wave picture will change direction and indicate a downward trend. After that lower prices would be expected. Check out the position of the stochastic indicator. It is in a similar position to March 10. At that time it only declined for another day but the market fell another 230 points - that's why I have called this a moment of truth.

An interesting observation

In my April 6 post I wondered whether it was the mini-crash following the Japan earthquake which was an over-reaction or the rally that followed. At the time I observed that by the time the earthquake had happened most of the down move had already taken place. That led me to conclude that something else had triggered the decline. If that is correct, that 'something else' has yet to become apparent. (I doubt is the strength of the dollar, but honestly I wouldn't know). The fact that the market was already falling sharply when the earthquake occurred seemed to have been forgotten in the rally that followed. I think we all just assumed that the decline was about the earthquake but in reality it could not have been. And there's something else. In bear markets, rallies are usually fast and furious - the sharp 2-day rally of April 20/21 could be such a rally. Is it possible that the rally from the March lows was a significant bear rally - a 'bull trap' to suck the bulls back in on the pretence that the previous mini-crash was really only about the Japan earthquake? There was such a rally in October and November 2007. It was so strong that it was hard to accept that the massive decline that followed would last. Could we be looking at such a situation again? (Refer to March 30 post).

Here's the chart of the XAO Indicator.