Toknights Bulletin - Newsletter 060809

ToKnights Bulletin ToKnights Bulletin is written by Charles Knights, an equity and options adviser with Shaw Stockbroking Limited. Charles has been an adviser since 1986 and has been at Shaw’s since 2001. A major part of his work is based on Elliott Wave analysis with a touch of Gann, but influenced to a large degree by Fibonacci levels. Charles can be contacted on 02 9238 1308 or via email [email protected]

There’s a bear in there... As the song goes “there’s a chair as well” which as it turns out has been handy because I feel that I’ve been sitting on the sidelines over the last few weeks of what I believe will ultimately, if not imminently be the end to this latest run . I’ll start with our market, move on to the Dow and finish with the four major banks that have been part of the driving force in our market.

The ASX 200 Index above shows how much the market has moved in a few months. I think that up to yesterday it had moved up 15% in the last 15 days - quite remarkable. Looking back at previous issues of ToKnights Bulletin I can take heart in the fact that my second issue dated 17th March 2009 did highlight the fact that I felt a bear rally was in the making. What I must admit though is that I thought the market would have retreated a few weeks ago. The intermediate high was in June which started to retrace, but it only turned out to be a 38% pullback, before storming off again.

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From there, in a matter of 3 to 4 weeks the market has burst through the 38.2% retracement of the May 2008 to March 2009 low. Whether it can continue from here to the next resistance of 4550, which is a combination of 50% retracement of the wave just mentioned and also a 38.2% retracement of the larger wave down from November 2007 to March 2009, is to me a bit too much to ask, but hey everything is now well with the world. Recession? What recession!

The ASX daily chart above shows how yesterday the market high matched the previous pivot high in November last year to within half a point. I have also highlighted the area in green where I was a firm believer that the market was forming a Head and Shoulders pattern between March and July, only to be left in the dust of a two week rally. I have also shown how the Make or Breaks (MOB) (the purple and blue horizontal lines) have proven to be relevant to support and resistance areas in the pass. Of course it just so happens that the market high of yesterday appears to have found resistance at the current MOB.

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The Dow chart shows the same parameters by way of Fibonacci retracements; however they don’t match up as nicely. Taking the bigger wave down we can see that there could still be a bit further to go on the upside, as the 38.2% retracement is just around 9400. Whereas the market crashed through the same level on the shorter wave three weeks ago! However I should point out that in the same bulletin in March this year I did say that the Dow would have to break the 9000 level What has to be addressed in both markets is the fact that the wave down to March 2009 is undoubtedly a wave 3. This is the easiest wave to find as it is usually the largest of all waves and is often identified by an indicator called an oscillator. The oscillator shows the difference between two moving averages (in this case the 5 and 35 period), and if you look at the ASX 200 chart on the first page you will see an example. So, if we have completed a wave 3 down and in the last four months have been in (I really want to say HAS COMLETED) a wave 4 up, then what does that mean for a wave 5 down? Well as always in this game there is more than one answer. A wave 5 down could take the market down below the March low (which I hasten to add a lot of technical analysts are suggesting) or at least have a double bottom. I have to say however that I am not that bearish and I’m looking for the possibility of a 50% retracement of wherever the current wave ends.

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The banks have been a major contributor to the rally and we can see that the retracement levels have worked well at various levels. ANZ has just reached the 38.2% level but CBA has powered on to be straddling the 50% level.

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NAB has perhaps not too unexpectedly dragged the chain somewhat and has still a way to go to reach the 38.2% level whilst WBC, after breaking through $21 appears to be potentially moving higher. In all cases when the Fibonacci retracement is used I find it is interesting to see how highs and lows in the preceding wave turn out to be relevant levels of retracement in the complete wave.

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© Charles Knights 2009

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