No Comments Written by Anthony Truong on August 29, 2008 – 8:34 pm

ASX200 – Currently in wave C up of wave 2 (see Daily chart); should get a decent rally into the 5,350-5,400 region, before wave 3 down starts.

Dow and S&P500 – Currently ambiguous; given the primary count in the ASX200, we believe a rally may be in order.

Gold – Correcting the fall from the mid-July highs to the mid-August lows; should have some modest upside before turning down and heading towards $600.

Dear Reader,

So there we have it – the markets prove us wrong again! But this should not cause us to lose faith in the Elliott Wave Principle – we have to keep in mind that it is NOT primarily a forecasting method, but rather a DESCRIPTION of market behaviour and patterns. It can help us to increase the probability of getting forecasts correct, but there is no such thing as a perfect analytical method.

Australian markets – the ASX200 rallied enough for us to bring the alternate count I mentioned on 27 August to the fore and become the primary count. This means that the ASX200 bottomed in wave 1 in mid-July; rallied up in a wave A (small labels on above chart); endured a very choppy wave B “contracting triangle” pattern, before thrusting out in wave C. We are currently still in wave C – it should continue moving up towards the 5,350 – 5,400 region (a resistance area comprised of a previous wave 4 and the 50% retracement of the entire fall from mid-May to mid-July 2008). Wave 2 should top in this area, before wave 3 (unlabelled) drops out.

US markets – the Dow and S&P500 rallied in the past 2 days, taking out our primary count of a subdividing third wave. At this point in time, we cannot see an absolute clear wave count to call our primary; there are 2 which have high probability in both markets.

The first (which in itself is actually a relative rare formation) is that of a “leading diagonal triangle” (see above chart) – this typically occurs in the wave 1 position, and can also occur in wave As. The diagonal triangle is comprised of 5 waves, each formed by only 3 waves (diagonal triangles are the only occurrance where an “impulsive wave” contains 3 wave structures), and the “impulsive” waves of the triangle (i.e. waves 1, 3 and 5) gradually get shorter and shorter (i.e. wave 1 > wave 3 > wave 5). Leading diagonals are rare, but often form at the beginning of major bear markets (which is what I am forecasting for the coming months).

The second alternate count is that wave 3 (unlabelled as yet on the above chart) has not actually started yet, but the choppy action over the past month has been that of a wave B contracting triangle (note: like the diagonal triangle, the contracting kind is comprised of 5 waves, each formed by 3 wave structures, but each wave [labelled "A, B, C, D and E"] gradually gets shorter and the entire pattern tends to move sideways). This would concur with what is occurring in the ASX200, but we must be cautious in trying to “fudge” patterns into disparate markets. With this scenario, the Dow should rally into the region 12,000 – 12,200 (this area of resistance is formed by the 50% retracement of the entire fall from 19 May to the low of 15 July 2008, and the orange downsloping trendline that was formed by the tops of October and December 2007). Wave 2 should top here and then fall in earnest in wave 3.

I’m leaning towards the second alternate count, because it does fit with what is occurring in the ASX200, but I won’t commit myself this time unless further confirmation occurs (i.e. the high of 11 August is broken above).

New analysis: Spot gold market

As you can see from the above Daily chart that spans a few years, gold experienced a major bull run that ended in an exponential form in March 2008 – spot gold topped at $1,034 and has never been back to that level since. I continue to believe that prices will move to around the $600 level, as this is where a previous large 4th wave contracting triangle formed, and contracting triangles (and 4th waves in general, for that matter) tend to be magnets for corrective moves. The count down from the March 2008 high is uncertain – I am not sure if what we are seeing is a major trend change (therefore the purple labels would read “1, 2 and 3“) or if this significant drop is actually just a correction in a larger bull market (therefore the purple labels would read “A, B and C“). We’ll have to wait and see; in either case, wave 3/C is subdividing into 5 waves (pink labels), which you can see nicely on the hourly chart below.

Gold is currently in a wave 2 correction – we should see a top in the region of $855 (38% retracement of the fall from mid-July to mid-August) to $870 (small 4th wave level), before prices continue their overall fall. Of course, there’s a larger 4th wave around the $900 region, but I am not sure if the gold market has enough strength to rally that far at this point. We will have to wait and see.

I will return either next Monday or Tuesday, with the usual equities update and will try to incorporate analysis for the EURUSD.

Happy trading!