Summary
Next week
Higher. The market will move higher this coming week.
Next 8 months
Significant rally. The ASX 200 will easily eclipse 8000 points this year. The probable price range is 8233 to 8690 points in the next 8 months.
2026
A new secular bull market, defined here as a significant multi-decade advance, will commence around the year 2026. 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 7567.3 points, losing 220.8 points or 2.8% for the week.
Exhibit 1 illustrates the price movement for the ASX 200 during the past week.
Last week, I wrote:
It is probable that the ASX 200 will experience a decline of around 1.8% to 3.8% this coming week.
From the close of trade last week to Friday’s low, the ASX 200 declined by 3.8%. This reinforces the likelihood that the current interpretation of Wave Structure is correct.
Around the Traps
Exhibit 2 compares the Banking and Materials1 sectors since the start of 2024. The dotted blue line corresponds to the 15 March.
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 hit a fresh rally high on Monday. There is no doubt that money is rotating out of 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) and into the Miners.
Disclosure: I went long a number of mining and energy-related names in accounts associated with me Wednesday through Friday.
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.
The Banks were down heavily this week. Despite this sell-off, I am no longer confident the 8 March high was a blow-off top. While the rate of descent is sufficient, I must consider the possibility that the ASX 200 could rise to 8600-8700 points later this year. While this rally will be led by the mining and energy sectors, a rally of this magnitude will likely require some help from the Banks.
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.
For the past two weeks, I have written:
C will likely be between 101% to 161% of A, which projects a probable range of 7489 to 7646 points.
C has, in all likelihood, bottomed at 7492.6 points on Friday—three points above the likely maximum target, 161% of A. Time has also literally run out for C. It's not impossible for C to move lower for longer, but it is highly improbable. For this reason, I went levered long the ASX 200 on Friday. See Tweet here.
By dropping to 7492.6 points, the ASX 200 achieved the likely minimum level for this consolidation—7496 points. This level was identified as the likely low on 15 March. For this reason, I believe C will be the actual price low of the entire consolidation, with E to trace out a higher low in maybe 4 weeks’ time.
Wave Structure since 8 March is consistent with a NEoWave Neutral Triangle (A-B-C-D-E). This 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. Wave-D needs to alternate with Wave-B in as many ways as possible. Alternation can occur via the following: price, time, retracement, complexity (essentially how many up and down moves comprise the wave) and construction (the price pattern).
Given that B retraced about 122% of A, D should retrace much less of C. My best guess is that D retraces 61.8% to 80% of C. This generates a probable price range of 7756 to 7834 points for D.
The duration of D is a little more difficult to forecast. B and C are somewhat similar in time, B being 22 data points and C 27 data points on the daily high-low chart. Therefore, D will likely be either 14 data points (7 trading days) or around 24 data points (12 trading days). I will proceed on the presumption that D will last around 7 trading days— being this short in time will allow it to be much simpler versus B in terms of complexity.
E will likely approximate A in price and/or time or be related to A by 61.8% in price and/or time. So, E will likely decline by 2% or 3.3%. At this stage, my best guess is that E will relate to A by 100% in price. This generates an approximate low of around 7532 points. My best guess, at this stage, is that E completes on/by 16 May.
I have made minor revisions to the forecast from last week, reflecting these new variables.
The risk-reward profile is skewed to the upside for the upcoming week. The downside risk is marginal, at a maximum of 0.5%. It is highly likely that the ASX 200 will see an increase of 2.0% to 3.5% throughout the week.
[X] will be followed by a major rally, which will be labelled [Y]. [Y] will likely be related to [W] either internally or externally. If these two major rallies relate externally, the most likely target is 8629 points, derived by taking 61.8% of [W] and adding it to the top of [W]. If [Y] relates to [W] internally by 100%, the target is 8690. If [Y] relates to [W] internally by 61.8%, the target is 8233. We cannot know which target should be our primary focus at this stage. Once [Y] commences, the rate of ascent will guide us to whether we should be working with the lower or the higher end of this range.
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.
20WD can be reduced down to [W]-[X]-[Y] on the daily high-low chart.
Per the six-monthly high-low chart, the minimum measured move for 20WD is likely 8200 points. It could go as high as 8500 to 8700 points. 20WD will likely finish in the second half of this year. The Monthly high-low chart suggests December 2024.
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.
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 declined this week.
Given its recent six-month high, this indicator remains bullish, 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 below under the heading Lexicon.
The Last Hour Indicator printed a fresh 21-month high this week.
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.
Seasonality
As I wrote back on 5 April, no matter how you slice and dice the data, April is the best month of the year for owning Australian shares. As a strong proponent of seasonality in financial markets, I am usually one of the most vocal about being long and strong risk assets in April.
This time, however, I sounded a warning that April may not follow the usual script. The primary consideration was Wave Structure, which suggested that the risk-reward profile was skewed to the downside till at least 22 April. The second consideration was the Puetz Eclipse Cycle. Per the primary variation, the most negative part of this cycle runs from around 16 April to around 8 to 15 May.
I don’t believe the current rendition of the Puetz Eclipse Cycle will cause too much concern for markets in general. The downward pressure from this cycle will dissipate over the next few weeks, at which point the significant upward influence on risk assets from the semimanual Geomagnetic Cycle should be clearly felt.
I feel it’s important to remind readers that seasonality in financial markets is nothing more than superstition and coincidence from the viewpoint of the conventional model of the financial universe. As an evidence-based investor, however, I defer to empirical evidence rather than the metaphysical musings of academic and mainstream financial practitioners on this matter.
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: 19-Apr-2024 23:29
Ljubljana: 19-Apr-2024 15:29
London: 19-Apr-2024 14:29
New York: 19-Apr-2024 09:29