Thursday, July 16, 2009

Some kinda crazy 5th wave

Following are charts of a few of the bellweathers for the Aussie market - BHP, CBA and WES. They are all displaying some type of desire to push higher. While I'm not a big fan of trying to dissect the minutae of the market by wave counts - there is something to the overall psychology that elliot wave offers - and these all look to me like there is some kind of 5th wave thing happening. On this evidence, while the market may need to a have a breather in the absolute short term, the chances are that we are in for a positive couple of weeks with the prices of all three to at least revisit their highs, if not push higher. That's a good thing. Let me tell you why...

I'm a believer in the idea that we are in a game changing market - that the excesses that accumulated over the last 10 years will be unwound in the most painful way possible. At the end of the process, the Matrix will be reset, no one will want to own shares and leverage will be a thing of the past. We are not there yet.

When I look around at the various stocks I follow (and we are gradually meandering our way through them on this blog), there are not many that I would consider truly cheap. There are some that are reasonably cheap, but too many are closer to fair value. This doesn't fit with the idea that things should be really cheap for a material length of time before a bottom can find a find a comfy resting place.

Also, while leverage is being unwound at the corporate level, there are still too many legacy issues persisting in the property, infrastructure and banking markets to say categorically that we are through to the other side. And in the face of consumers turning from spenders to savers, governments around the world are diving deep into debt. Conclusion - that we are getting closer to the end of the cycle, but haven't got there yet.

So when I look at the charts above I see a market that is likely to push higher, but in opposition to what really needs to happen for the re-birth to begin. It's a rally ahead of the fall - as indicated by the lack of endorsement from rising volumes and a continuing divergence in momentum. If we track higher these will be the things I'll be watching. What we really want is for sentiment measures to tick higher in favour of the bulls and for the market to stretch to the top of these trend channels. That'll be the time to start strategising for the next downleg...

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