ASX 200 Forecast 2024-Dec-13
One last rally attempt?
Disclaimer: This market letter represents the views and opinions of the author. It does not constitute investment advice. It is my online journal to share knowledge of an alternative philosophy of financial markets and how I use this philosophy to trade. You should consult a financial adviser if you require professional assistance with your portfolio. I am not a financial adviser.
A link to an article I wrote for FNArena, “As good as it gets for Australian Equities.”
Summary
While it is likely that there will be one final rally attempt ahead, the possibility that the ASX 200 has also peaked must be considered.
Following this peak, a 2–3-year bear market will take place. From peak to trough, the decline will likely be around 24%.
Sometime in 2027 or 2028, a new secular bull market will commence, defined here as a significant multi-decade advance. Wave Structure suggests it will be the greatest bull market in the history of Australian equities.
In the wake
Exhibit 1 illustrates the price movement for the ASX 200 this past week.
Forecast
Exhibit 2 depicts the prevailing interpretation of price behaviour on the weekly high-low chart for the ASX 200.1
I have made no revisions to this forecast on the weekly high-low chart.
The best explanation of price behaviour from late 2023 is a NEoWave Contracting Triangle, a corrective price pattern consisting of five segments or waves labelled alphabetically (A-B-C-D-E). Appendix One provides a deep dive into this price pattern.
23WC is in the process of peaking or has peaked.2
In a NEoWave Contracting Triangle, the ideal conclusion for wave-C is 61.8% of wave-A, setting a target of 8402 points for 23WC. When wave-C marks the highest point of the price pattern, it often surpasses the ideal conclusion by a margin.
I had been hoping for a move to 8600-8650 points, but this had more to do with my trading charts than Wave Structure. I still think there is one last rally attempt ahead, which may involve a push into the 'death zone' —where a sudden shift in sentiment becomes probable— which starts at approximately 8600 points. But we must also consider the possibility that 23WC has been completed, discussed further below.
In a NEoWave Contracting Triangle, the ideal time conclusion of wave-C is the average of wave-A plus wave-B when these two waves differ significantly in duration. This was late October or early November for 23WC. However, given the expectation that 23WC will extend past the ideal price target, it should terminate slightly later. Either 23WC has peaked and completed, or it will peak and complete around the end of December or the start of January. This is discussed in more detail below.
Looking forward, 23WD will likely bottom somewhere between 7500 and 7700 points in late 1Q2025 (first quarter of 2025) or early 2Q2025.
Exhibit 3 depicts the new interpretation of price behaviour on the daily high-low chart for the ASX 200.
I have made a meaningful revision to the forecast, allowing one more rally attempt in the next few weeks. The old interpretation is discussed further below.
The decline from the all-time high of 8514.5 points on December 3 to the low of 8263.5 today equals 2.94%, making it the most significant decline since November 1.
New trends should commence with a move that is further and faster than the largest nearby move in the same direction; otherwise, how can one sensibly argue there has been a real shift in market psychology?
The exception is when a new trend begins with an expanding bias, so that the smallest move occurs first, with the largest move occurring at the end. I don't think an expanding pattern makes sense at this juncture, so for now, I will ignore this possibility.
So, unless we witness a decline of 1.6% or more in two trading days or less (preferably less) - which is the size of the decline measured by the first red box depicted in Exhibit 4 - we should assume whatever price pattern is unfolding is not complete.
Regarding the prior interpretation, which viewed price behaviour through the lens of a NEoWave Diametric, another rally in the weeks ahead is nigh impossible, so a revision is called for.
The interpretation that makes the most sense is that the rally since November 1 is a Neutral Triangle (A-B-C-D-E) or a NEoWve Expanding Triangle (A-B-C-D-E). The ideal time conclusion for [D] was today, hence why I added to my levered long ASX 200 position. [E] will peak and complete by the end of December or early January. Regarding price, whether [E] completes at a lower high than [C] or whether it pushes through to a new all-time high, I am not sure. The rate of ascent over the coming week will tell us what we can likely expect.
Exhibit 4 depicts the interpretation of the price behaviour I used up until last week.
According to this interpretation, the NEoWave Diametric is complete, and so too 23WC. A new psychological downtrend, 23WD, has commenced.
Given that the Diametric completed within the most likely range (90% of the time) for both price and time - the purple shaded box - it is possible that the peak is in. That said, I think the odds of this scenario are much lower due to the lethargic nature of the recent decline to date. If the ASX 200 can rally meaningfully early next week, we should be able to put a line through this scenario.
Smart money
Exhibit 5 compares the ASX 200 with the Last Hour Index, the cumulative measure of the net change in a share market index during the last hour of trade.
The premise behind this indicator is that professionals are most active during the final hour of trading, a time when liquidity reaches its zenith. This interval also marks the final chance to initiate or liquidate positions within regular trading hours. Therefore, the Last Hour Index offers an alternative view of risk appetite with turning points in this indicator typically preceding turning points in the benchmark index.
The Last Hour Index peaked on November 18 and has moved lower meaningfully ever since. This is bearish.
The Last Hour Index for the equal-weight ASX 200 is even more bearish, hitting a three-and-a-half-month low (not shown).
Market Internals
Exhibit 6 compares the ASX 200 with the Composite Advance-Decline Line (A-D Line).
The A-D Line is a representation of the cumulative total of the number of advancing issues (stocks that closed higher) minus the number of declining issues (stocks that closed lower) each day. When most stocks are moving higher, the A-D Line rises. Conversely, a declining A-D Line indicates that most stocks are moving lower. It provides a strong indication of the health of a market trend. The greater the participation of stocks, the greater the chance the trend will continue in the foreseeable future.
The chart above does not include data for today.
Regarding the very short-term, since the all-time high, the ASX 200 has moved much faster to the downside than the AD Line, which is unusual if a new downtrend has commenced. This suggests the peak on December 3 was the penultimate peak.
In terms of the bigger picture, there is a bearish divergence between the ASX 200 and the Composite Advance-Decline Line, with the latter failing to confirm the recent high for the benchmark index. This is consistent with the thesis of a meaningful top for the ASX 200 in the not-too-distant future.
Risk Management
Until March/April, the risk-reward profile is heavily skewed to the downside. Upside risk is likely limited to 8650 points. The target range on the downside over this same timeframe is 7500-7700 points.
Investment accounts
On December 3, I finished the sale of all non-core holdings, retaining some quality and speculative stocks for the medium to long term.
I have yet to hedge the downside risk with respect to the remaining stocks.
Trading Accounts
I am still levered long the ASX 200. I added to this position early today on the assumption there is one last rally attempt ahead - if this interpretation is valid, downside risk over the coming days should be minimal to non-existent.
I have fielded some questions as to why I remain long the ASX 200 but have sold down the majority of stocks in portfolios associated with me. That is because the majority of stocks peak before the actual peak in the benchmark index itself, which is more of a reflection of how the “largest, safest, most liquid” issues are doing than a true representation of what the “market of stocks” is doing. Years ago, I did research that showed around 1/3 of stocks were already entrenched in bear markets by the time of the peak of the benchmark index. Only 1/3 of stocks peaked in conjunction with or after the peak in the benchmark index.
Lake Bohinj, under the cover of clouds. The lake is around 800 metres below where I am standing.
Appendix One
The NEoWave Contracting Triangle is a corrective price pattern consisting of five segments or waves: three trending waves labelled A, C, and E, and two countertrend waves, B and D.
Each successive trending wave is smaller than the preceding one, hence the designation "contracting".
PRICE
Wave-A is a significant violent move. It is usually the longest leg of the triangle.
Wave-B should retrace at least 33-38.2% of wave-A. It usually retraces around 80%. In some instances, wave-B can be the longest wave of the triangle.
The ideal price conclusion of wave-C is 61.8% of wave-A. In some instances, when this wave reaches the highest point of the price pattern, it will extend past the ideal price conclusion by a margin.
Wave-D should retrace at least 33-38.2% of Wave-C. It usually retraces 61.8% or more. It should alternate with wave-B in as many ways as possible. Alternation can occur via the following: price, time, the severity of retracement of the prior wave, complexity (essentially how many up and down moves comprise the wave) and construction (each leg of a triangle will subdivide into its own price pattern if the chart shows sufficient detail). Wave-D can be longer than Wave B - this is known as reverse alternation (this is not permissible in orthodox Elliott Wave).
TIME
Although Wave-B is usually longer than Wave-A in duration, there are instances where it can be shorter.
When two adjacent waves of a triangle are similar in time, the next wave will likely be the sum of the combined times of the two adjacent waves. If the two adjacent waves are very different in duration, the duration of the next wave will likely be the average of the two adjacent waves.
POST PATTERN BEHAVIOUR
The thrust after a NEoWave Contracting Triangle will generally be as large as the widest wave of the Triangle. Confirmation of a new trend requires the initial rally to be larger and faster than the longest countertrend rally of the price pattern, either wave-B or -D.
Lexicon
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).
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: 13-December-2024 17:48
Ljubljana: 13-December-2024 07:48
London: 13-December-2024 06:48
New York: 13-December-2024 02:48
A high-low chart plots the period's highs and lows in the order in which they occur. I only utilise price action between 10:10 and 16:00 when the market is fully open.
23WC is the nomenclature for Wave-C of the price pattern that commenced in 2023. This means of labelling was developed by the late Zoran Gayer.