No Comments Written by Anthony Truong on September 9, 2008 – 7:00 pm

Well, we certainly got the volatility that was expected from the announcement that the US Government (specifically, the US Treasury Department) would be taking over mortgage giants Fannie Mae and Freddie Mac. I was expecting some upside once the news was released, but the rallies across global markets have far surpassed my initial expectations. Therefore, although I am still long-term and short-term bearish, an alternate count for the Aussie markets has crept into view.

Let’s recap: the ASX200 made an all time high on 1 November 2007. From that top, 5 waves can clearly be seen from the start of November 2007 through to the low of 16 March 2008 – this 5 wave pattern strongly implies that the Australian bull market of the past 4-5 years was complete on 1 November 2007, and the new trend has turned down, i.e. a major bear market has begun.

From the low of 16 March 2008, the ASX200 rallied in a choppy fashion forming 3 distinct waves, into the high of 19 May 2008, before dropping out and falling in 5 clear waves (i.e. direction of trend is still down) to the bottom of 15 July 2008. It is from this juncture that the waves get a bit tricky to read.

My primary count is that since the low of 15 July 2008 (which I am labelling as wave 1 of a larger wave 3 [unlabelled as yet]), wave 2 has been forming. It traced out a wave A into the high of 23 July 2008, before a wave B contracting triangle took prices sideways for approximately a month. Wave B ended at the low of 25 August 2008, and wave C thrusted out from this triangle and topped on 2 September 2008.

From this most recent high, we have waves 1 and 2, which would suggest wave 3 (not labelled) is about to start.

However, the rally of “wave 2” has formed a pattern that looks very impulsive.

If you view the above chart, you can see the top alternate count that I am following at the moment. It suggests that wave B did not actually form a contracting triangle, but instead became an irregular “flat” correction – flat corrections are made up of 3 waves; the first two are themselves made up of 3 waves (labelled “a” and “b“), and wave b tends to end near, at or even slightly beyond the origin of wave a. Wave c, the final wave in the flat sequence, is made up of 5 waves, and usually ends beyond the termination of wave a. In this case, wave c ended a few ticks above the termination of wave a.

If this latter count is correct, then the rally that we witnessed on Monday was actually part of wave C and should have further to go before topping (it should break above the wave A high of 5,161, but ideally we’d like to see it surpass the wave b of wave B high, which is 5,186).

As you can see in the Hourly chart above, wave C should have at least one more leg up to complete 5 waves. This could carry wave 2 overall into a prior resistance level that was mentioned in a previous email – 5,350, plus or minus 50 points.

Although the fall from yesterday’s top (5,107.5) has traced out 3 waves, further strengthening the alternate count, I am going to stick to my guns and still say I am short term bearish. I would change this view if yesterday’s high is taken out.

Happy trading!