No Comments Written by Anthony Truong on August 27, 2008 – 6:25 pm

I’d just like to give a warm welcome to our newest subscribers – I hope this newsletter will assist you in any investing decisions you make in the near future. Please feel free to contact me if you have any questions, and especially if you need some help understanding the Elliott Wave Principle. I will endeavour to respond in a timely fashion.

Now on to the analysis: I’ll start with the ASX200.

The Australian markets topped on 1 November 2007 and has since traced out a clear 5 wave move (note: impulsive, therefore implies the major trend direction) to the downside to bottom on 16 March 2008. Since then, it rallied up in a clear 3 wave form (A-B-C)to 6001.5 on 19 May 2008, before continuing its down trend.

Now, it’s clear that the overall direction is down, given the 5’s and 3’s (basic structure of Elliott waves). However, at the current juncture, there are two possible scenarios. My primary count (chart above) is that intermediate wave 1 has yet to bottom; the last month or so of market movement has traced out a “contracting triangle”, which typically occurs in the 4th
wave position – in this case, a smaller wave 4. Thus this implies one more thrust lower in wave 5 is required before a temporary bottom forms, and wave 2 up begins. Given the count we have for the US markets, I am anticipating that wave 5 will “extend” and drag the market significantly lower in tandem with a US crash.

The top alternate for the ASX200 (depicted in the chart above) is that wave 1 bottomed at the 15 July 2008 low, and we have thus far formed a wave A up, and part of a wave B triangle. This would imply a modest drop before a rally to a new high above that of 23 July 2008 to complete wave 2; subsequently, markets would drop precipitously in wave 3 (currently unlabelled). This count is not favoured, due to what I am seeing in the US markets, but we do have to note its potential.

On to the US markets: so the Dow and S&P500 did not drop out as viciously as I had anticipated in my prior update, but the overall view is still for a major move down.

We are merely seeing subdivisions of wave 3 (currently unlabelled in the hourly charts of both Wall Street and SPX500 above) form; the more subdivisions, the lower prices will go before the larger degree wave 3 (also currently unlabelled in the daily chart of Wall Street below) bottoms.

The S&P500 broke above the purple down-sloping trendline again last week, only to close back beneath it (see the 3 “false breakouts” on the SPX hourly chart); this is EVEN more bearish. This shows that the market knows how important the down-sloping purple trendline is, which is drawn from the all time top on 11 October 2007 and the high of 10 December 2007.

Short term, we may see a small-ish rally form to take the Dow and S&P500 above the high of 26 August 2008 (11,437 in the Dow and 1,275.6 in the S&P500), but DOWN DOWN DOWN is still the overall forecast.

I will return in the next few days to take a look at gold and the EURUSD, and perhaps to update on the situation in equities.

Happy trading!