Summary
Next week
Lower. The risk-reward profile is skewed to the downside next week.
Next 8 months
Significant rally. The ASX 200 will easily eclipse 8000 points and should move above 8200 points in the next 8 months.
2026
A new secular bull market, defined here as a significant multi-decade advance, will commence. Long-term wave structure and price behaviour suggest it will be the greatest bull market in the history of Australian equities.
Disclaimer: at end.
In the wake
Australia's benchmark share market index, the S&P/ASX 200 (ASX 200), closed at 7788 points, gaining 14.8 points or 0.2% for the week.
Exhibit 1 illustrates the price movement for the ASX 200 during the past week.
Last week, I wrote:
Potential upside is marginal (less than 1% at best). It is probable that the ASX 200 will experience a decline of around 1.6% to 3.7% in the next one to two weeks.
By Wednesday, the ASX 200 was 1.2% higher than Friday’s close, marginally higher than where I thought any potential bounce would peter out. I had assumed we would have seen more downside this week, but this is not a deal breaker for the current interpretation so long as the ASX 200 declines this coming week.
Around the Traps
Exhibit 2 compares the Banking and Materials1 sectors since the start of 2024.
On 15 March, I wrote that I expect:
A large rotation out of banks and into mining companies.
The Materials (mining and related companies) sector continues to print fresh rally highs, while the S&P/ASX 200 Financials Ex A-REIT index (I refer to this index as the Banks since the four major banks comprise two-thirds of it) remains below its 8 March peak.
On 15 March, I also wrote:
If this is a valid blow-off top for the Banks, this index will return to 7000 points, give or take 200 points. This would represent a circa 17% decline in about 3-5 months… I am 70% confident it is a blow-off top.
Price action remains consistent with the thesis that the 8 March high was a multi-month or multi-year top for the Banks. If it is the latter, the Banks need to pick up the pace to the downside very shortly.
Forecast
Exhibit 3 reveals the daily high-low chart for the ASX 200. A high-low chart plots the period's highs and lows in the order in which they occur.
I have made minor revisions to last week’s forecast. I have pushed back the termination of C by a week and reduced its length.
Last week, I wrote:
Because A and B are different in time, we can project the completion date for C by taking the average time of A plus B. This calculation suggests 12 April. Now, this relationship doesn’t always work as well in Triangles as it does in other Corrective Price Patterns, but nevertheless, it should give us an excellent approximation.
The expected rate of descent per the forecast last week was based on the assumption that C would terminate around 12 April, which has proven wrong. This is not a deal breaker for the current interpretation. So long as the ASX 200 declines to at least 7646 points by the end of this coming week, the current interpretation of a NEoWave Neutral Triangle for [X] remains plausible.
A NEoWave Neutral Triangle (A-B-C-D-E) is a Corrective Price Pattern that consists of five waves or segments labelled alphabetically (A-B-C-D-E). It consists of three trending (A, C, and E) and two non-trending (B and D) waves. Wave-C is the longest of the trending waves; it is typically related to Wave-A by around 138%, though it can be as short as 101% or as long as 261%.
C will likely be between 101% to 161% of A, which projects a probable range of 7489 to 7646 points.
Rather than a NEoWave Neutral Triangle, it is possible that a NEoWave Flat (A-B-C) is unfolding, with C unfolding as a Terminal (Diagonal in the parlance of orthodox Elliott Wave Theory). This would potentially allow the ASX 200 to decline for another two to three weeks rather than just one week per a Neutral Triangle.
By the end of this coming week, I should know which Corrective Price Pattern is unfolding. Regardless of whether it is a Neutral Triangle or a Flat, the ASX 200 should decline this coming week. Regardless of which pattern is occurring, [X] will not be finished for at least another two to four weeks.
At current levels, the risk-reward profile remains skewed to the downside. Potential upside is marginal - 1.2% at best. It is probable that the ASX 200 will experience a decline of around 1.8% to 3.8% this coming week.
Exhibit 4 reveals the six-monthly high-low chart for the ASX 200.
Wave Structure is consistent with a NEoWave Contracting Triangle (running variation) commencing in March 2020. Exhibit 5 below reveals more information about this price pattern.
There is sufficient evidence to confirm the likelihood that 20WD, Wave-D of the Corrective Price Pattern that commenced in 2020, is currently underway.
The minimum measured move for 20WD is likely 8200 points. 20WD will likely finish in the second half of this year. The Monthly high-low chart hints at December 2024.
Wave Structure suggests the market could go as high as 8500 to 8700 this year, but the probability of that scenario has declined recently. I think it prudent to assume that 20WD will peter out somewhere between 8200 and 8500 points.
The NEoWave Contracting Triangle is a corrective price pattern that consists of five waves. It includes three trending waves (A, C, & E) and two countertrend waves (B & D). Each successive trending wave is smaller than the preceding trending wave, which is why it is called "contracting."
The “running” variation of a Contracting Triangle is rare. Both countertrend rallies are more substantial than the trending wave that they follow. Although they are larger in price, they move at a slower rate, which is why they are considered countertrend in nature. As a result, the correction happens "on the run". This pattern indicates a very strong (or weak if this price pattern occurs during a downtrend) market, and you can expect a significant move after the completion of the running Contracting Triangle.
Seasonality
I will touch base on seasonality next week.
Market internals (Vital signs)
Exhibit 6 compares the ASX 200 with the Composite Advance-Decline Line (A-D Line), the classic measure of market breadth (how many stocks are participating in a market trend). More details about this indicator can be found further below under the heading Lexicon.
The Composite AD Line rallied this week.
Given its recent six-month high, this indicator is on the bullish side of the ledger, implying the likelihood of further gains for the ASX 200 in the short to medium term.
Smart money
Exhibit 7 compares the ASX 200 with the Last Hour Index, a gauge of what participants with deep pockets (smart money) are doing. More details about this indicator can be found further below under the heading Lexicon.
The Last Hour Indicator was marginally lower this past week.
Given its recent 21-month high, this indicator is on the bullish side of the ledger, implying the likelihood of further gains for the ASX 200 in the short to medium term.
Portfolio Management
While Wave Structure points to the likelihood of much higher prices for the ASX 200 over the next 5 to 8 months, this rally will likely be concentrated in fewer and fewer stocks as it progresses. It still makes sense to remain fully invested, but only in companies performing well from a price viewpoint.
Disclaimer
This market letter was prepared by Daniel Goulding and represents the views and opinions of the author. It does not constitute investment advice. My work is didactic in nature, serving to increase readers’ awareness of an alternative philosophy of financial markets. I write generally and cannot determine whether an investment is appropriate for your particular needs, individual circumstances or risk profile. You should consult a financial adviser if you require professional assistance with your portfolio. I am not licenced or affiliated with any licensee. Therefore, I am free to speak my mind.
Lexicon
Composite Advance-Decline Line (A-D Line): the cumulative total of the number of advancing issues (stocks that closed higher) less the number of declining issues (stocks that closed lower) each day. The A-D Line is the classic measure of market breadth – a term that describes how many stocks are participating in a market trend. When the majority of stocks are moving higher, this is reflected in a rising A-D Line. A declining A-D Line, on the other hand, indicates that the majority of stocks are moving lower.
Corrective price pattern: A reaction against the prevailing trend of one larger degree. Overlapping is a common feature although it is not a strict prerequisite. Corrections are an outgrowth of indecision or ambiguity with respect to the future. They are labelled alphabetically (A-B-C etc).
Elliott Wave Principle: the idea that market behaviour is self-affine in nature due to recurrent oscillations in public opinion across different but simultaneous timeframes. It posits that price action can be defined, quantified and classified, and used to project the future evolution of price.
Impulsive price pattern: A fast-moving market. Impulse waves produce a significant change in the price level. A distinctive feature is minimal or no overlapping, depicting a strong level of conviction about the outlook. They contain five segments labelled numerically (waves 1-2-3-4-5).
Last Hour Index: the cumulative measure of the net change in a share market index during the last hour of trade. The idea behind this indicator is that large market participants are most active in the last hour of trading when liquidity is at its zenith, as well as being the final opportunity for them to open or close positions ahead of the close of trade.
NEoWave: Neely Extensions of Elliott Wave. The body of knowledge enunciated by Glenn Neely, represents a significant break or extension of the original theory postulated by Ralph Elliott.
Price behaviour: the quantitative assessment of price action. Essentially, the largest, fastest moves are always in the direction of the prevailing psychological trend.
Wave structure: the quantitative relationship between different waves of price action.
Transmission time:
Sydney: 14-Apr-2024 19:37
Ljubljana: 14-Apr-2024 10:37
London: 14-Apr-2024 09:37
New York: 14-Apr-2024 04:37