an updated market outlook v. 2
TRANSCRIPT
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Will summers End bring a Bear Markets beginning?
The Markets dreaded month, T-Bills, and Elliot Wave Trades
Summers end
Since the rally ended in late April, both intra and inter-market correlation has risen to significant levels
which has largely caused the risk-on, risk-off market swings we have seen. Other than timely day-traders, this
erratic market action has made trading difficult in the short-term, especially for equity investors whose alpha-
seeking strategies have almost useless in light of the macroeconomic factors at play. Many opportunities have
been in the Forex markets, where congruent market action has produced reasonably foreseeable short-term plays.
Traders looking for a long-term play in Forex markets, however, have been forced to be patient as no serious trend
has developed yet. The waiting may soon be over however; as summers indecisive action seems to be ending with
September approaching and a declining economic outlook.
September has been a historically bad month for markets, and has actually tended to foreshadow the
major bear markets in US history. For some perspective on the months poor performance: since 1929, the S&P
500 has performed the worst in the month of September, losing 1.3% on average compared to the monthly
average of .54% for a year. And the beginning of the major US bear markets of 1929, 1973, 1987, and 2000, all
started in September (with 2008s crash following shortly thereafter in October, and 1981s actually starting in
November of 1980).
Even without any further economic analysis, it appears that, if history does continue to repeat itself,
September may bring further economic woes, or at least not be overly recompensing. A repeat of the past is ofcourse is not a sure-thing as markets can in no way be deemed predictable (at least not according to Websters
definition). However, when delving a little deeper into historic market action and its relation to current
movements, it seems the start of another bear market is not just a feared possibility but a likely outcome.
Interesting T-Bill Patterns
Year Bear Market Began S&P 500 Performance S&P 500 In September
1973 -14.70% -11.93%
1980-1981 -4.90%* -5.38%*
1987 5.20% -2.42%
2000 -9.10% -5.35%
2008 -37.00% -9.43%
2010 -2.02% ?
*1981
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After looking at some relationships between Treasuries and the S&P 500, I noticed an interesting pattern
that may also suggest a sell-off is near. Although it may be hard to see, this chart shows the S&P 500 on the RHS,
and the 10-year T-Bill on the LHS on a month basis from 1979 to now. On the bottom is a graph of correlation
values between the two. If looked at closely, it can be seen that every time the correlation value rises above .50
and then begins to cross back down below it, a sell-off occurs in the S&P 500. These are usually also near the peaks
in the 10-years as well. Examples of when this cross occurs are indicated with yellow lines, and as can be seen, it
predicts an S&P sell-off quite well. Interestingly enough, the correlation value recently rose obe the .50 level,
peaked, and now is heading back to the .50 level on the way down. If this pattern holds, this may suggest S&P
selling is near.
Correlation seems to have
peaked and is heading back
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AUD/USD and Elliott Wave Trading
As mentioned above, market correlation has been climbing quickly over the past months,
causing certain currency pairs to move together directionally to similar price levels. These levels have
been extremely close to the Fibonacci retracement levels of the Elliot Wave theory. According to RalphElliott, "because man is subject to rhythmical procedure, calculations having to do with his activities can
be projected far into the future with a justification and certainty heretofore unattainable."It seems that
when markets are moving more closely together, these levels become more important as increasingly
more traders are looking at, and reacting to the same news and movements.
Fortunately, Elliots theory applies to both the short-term and long-term. This greatly assists in
planning accurate entry points and profit targets on short-term trades, as well as predicts future large-
scaled price movements in the weeks and months ahead. Since equity markets have produced fewopportunities recently, currency pairs are the main focus in the upcoming month, focusing on those with
significant upside and large long-term move. AUD/USD is one of the pairs that should be followed
closely, as it seems poised to make that sizeable move in the near-future, and is following a text-book
Elliot Wave long-term trend reversal.
According to Elliot Wave, market prices follow 5 main waves in a trend, each with its own
characteristics. AUD/USD has followed these patterns almost exactly, possibly giving insight of whats to
come.
Wave 1: Wave one is rarely obvious at its inception. When the first wave of a new bull market
begins, the fundamental news is almost universally negative.
Wave 1
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Wave 2: Wave two corrects wave one, but can never extend beyond the starting point of wave one, and
prices should fall in a 3 wave action.
Wave 3: Wave three is usually the largest and most powerful wave in a trend. Wave three often extends
wave one by a ratio of 1.618:1.
Wave 4: Wave four is typically clearly corrective. Prices may meander sideways for an extended period,
and wave four typically retraces less than 38.2% of wave three.
Wave 2
Wave 3
Wave 3
Wave 4
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Wave 5: Wave five is the final leg in the direction of the dominant trend. The news is almost universally
positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right
before the top.
As we can see from the graphs, after AUD/USD began selling on August 9th
after it hit the 161.8%
retracement level of Wave 3, it sold-off to the 38.2% retracement level at .886 to complete wave 4.
Wave 5 would then be this recent run-up in price that has taken place August 15th
to the peak on August
17th. This suggests the bullish 60-day trend has ended and a new bearish trend is beginning.
The new bearish trend would also be supported by the Fibonnacci levels shown in the graph
directly above, where If the newbearish trend were to begin after the peak on August 8th-9th at .921,
and the 5-wave cycle were to begin again, the new Wave 1 would be occurring from August 8th
August
15th, and the New Wave 2 would be the retracement back to the 61.82 level reached on August 17.
Wave 5
Start of new
bearish trend
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If the rest of the new cycle were to play out as the first one did, hitting the retracement levels
as expected, we can get an idea of possible price targets for an AUD/USD short. The 161.8% retracement
level that goes along with wave 3 of the newbearish trend, comes in at about .8875, or almost 200 pips
from the current price level.