Microsoft Word - The Chart Buff 211111 _2012 forecast_The Chart Buff Technical Trading Ideas for the Active Investor
21/11/11 Special Report Research by Gary Glover
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Australian Sharemarket - 2012 Forecast
I normally do our yearly forecast at the start of each year but I think it might be pertinent to look at 2012 a bit earlier than normal because it
could be on the back foot from the very start. Our forecasting for the past two years has been very close to actual events and after making a
couple of small adjustments last year I think 2011 has been our closest call to date.
Looking at events of 2011
After a strong start to the year and some congestion in the second quarter, we expected to see a sharp sell off into the third quarter which
would take the market to a new low below 4100 for the year before a mild recovery to end the year. Our forecast also supported a very bearish
commodities view for the year past and this view was projected into 2012.
We have used a combination of the gann cycles - the 60 year cycle and the 10 year cycle to form part of our larger view and in particular we
have found a closeness with the 1980's pattern of trend and used this as a best fit, which was extremely successful in 2011. Using some Elliott
Wave analysis to do our price projections has assisted us to make accurate price projections giving us the minimum moves expected which have
almost always been met. Throw in a few other cycles and larger long term technical patterns and we should come up with a good road map for
2012.
Most bear markets generally last 5 years in duration, so late 2012 would be ideal timing from the Nov 2007 high. Even 1987 had its first higher
low 5 years from its high, so this time period has some good validity.
Recapping our 2011 forecast- made on 14/2/11
Our Forecast - the most interesting aspects for our 2011 forecast include the topping action and volatility present in the first half of the year and
the third quarter sell off.
The recent volatility in our markets surely supports this type of price action continuing. The crowd is currently moving from the bullish to bearish
camp in a matter of days now so this volatility is most certain to continue.
The sharp selloff in the third quarter is the danger period for our market so we will need to look at increasing our cash positions come June/ July
period and we might even look at some hedging or possibly some short positions for the third quarter. A series of lower highs in the 2 nd
quarter
will be confirmation enough to take some protective action.
The 60 year cycle is painting a very negative picture for the second half of this year and is consistent with our decade cycle so the next 12 to 18
months will be particularly interesting for our market and we will need to position more conservatively in the second half. Because U.S. markets
will remain firm there will be plenty of stocks that should still rise in this period so we’ll look to identify these in the next few months.
I would have to give us a 9 out of 10 mark this year, the early August low is really the only variance on our forecast, with a retest in October
conforming to our view.
2011 Actual (current)
As you can see our forecast has been a very good one for 2011 and we will use the same parameters as last year and focus on the 60year and
1980’s pattern of trend to provide us the best road map for 2012.
The 10 Year cycle
Looking at the 10 year cycle paints a very bearish pattern for 2012. Of all the years in the 10 year cycle this is typically one of the weakest.
For the All Ord’s, looking at the last thirty years the '2' year has been pretty dreadful.
2002 -11.4% (lowest point for year was -15.4%)
1992 -6.6% (lowest point for year was -19%)
1982 -18.5% (lowest point for year was -25%)
1952 -11.8% (lowest point ? but index finished 33.5% down from May 1951 high)
The late bounce in the last quarter has often made the results look better than actual reality. As you can see the average is approx -12% for
year end and average low point during the year is -19.8%, so a 20% decline for 2012 at some point is the norm. The 60 year cycle and the 1982
pattern of trend which has been the most reliable of late are both very negative next year.
<Projecting a 20% decline from current highs of 4400 gives us a target of 3520 or 25% decline gives us a target of 3200>
The clear pattern of trend from the ‘2’ year is the market is on the back foot right from the start. There is a possibility of an April rally but it
remains very weak and quite negative until July/Aug as a minimum. There is the likelihood of a couple of descent bounces on the way down but
it could remain under pressure until the start of the last quarter. Buying at the end of the 2nd year or start of third year is normally the
beginning of the next bull market, so the last quarter of 2012 could be one of those circumstances.
20002/1992/1982 – The ‘2’ Year
The 60 Year Cycle
The 60 year cycle which has been so reliable for the last 6-8 years is also very bearish for the Australian market. If you recall our special report
we did back in early November 2010, we illustrated that the 18 months from May 1951 to Dec 1952 saw large divergences between markets.
While the U.S. Markets were up 8% over this period, commodities were down 42% and the All Ord's suffered a 33.5% decline due
to the weighting of commodity stocks on our market.
The 60 year cycle is clearly suggesting commodities are likely to drag our market lower next year.
Previous resource booms have seen us experience big moves up and down in our share markets. The 1970s was another period where we had
large moves in commodity prices and terms of trade for Australia. The All Ordinaries slumped 54.1% from Jan 1973- Oct 1974 after commodity
prices plunged lower, our market has historically been very influenced by commodity prices.
Commodities Index (CRB) 586 Weekly Chart
The big concern here is now we have a series of lower highs, typically how topping patterns set up and the last move down finally got a bit
impulsive to the downside. We have spoken about this index over the past month in detail and believed that we were at a key junction here, a
point where the trend could accelerate to the downside. In terms of our longer term forecast I consider a move down towards the 450 region
where the last upward drive started in 2010 should be our minimum target.
Looking at our Post GFC research (Sep 2009)
What happens after a GFC style event where we see a massive correction. Our research we did back in September 2009 called for a quick rally
off the lows that would bounce back to the 50% of the range in approximately 35 weeks and then spend the next few years or even as long as a
decade trading sideways in a larger sideways range. In most instances the market came back 3-4 years later for a retest of the cycle low. After
the 1929 low, the index came back to make a new low in 1932. After the low in 1938 it made a new low in 1942. Again after the 1970 low it
made a new low in 1974. 1987 was the exception. 1987 made a higher low in November 1992.
If you take a look at the 1938 low and what ensued, our market has basically mirrored this market since the 2009 low. I suspect this could be a
very good road map to monitor going forward.
Dow Jones Industrials 1938
It is all very concerning for 2012.
Although all the cycles are pointing to another down leg for 2012, it’s the possibility of retesting the 2009 low that concerns me the most.
This European crisis is likely to grow into something more concerning based on the cycles and this would appear quite logical at the moment.
The 60 year cycle is calling for a larger move down in commodities and Australian Equities markets and Europe debt issues could be the
contributing factor. The 1980's cycle which has been the best roadmap for the last two years is potentially calling for another large move down,
1982 fell Almost 25% from its highs, so let's hope the index can get going higher before year end.
Is a retest of the 2009 low possible - well based on history and previous style of trends, you would have to say Yes. A marginal break below
3100 is a real possibility. What is more likely, is a deep retest that possibly doesn't come that low, so a pullback to 3600 is a more realistic goal,
but there is no skirting the possibility that something lower is a real threat. Our cycles are suggesting Europe could become more of an issue.
The fact that bank stocks and a lot of the industrials came back to single digit PE ratios and almost double digit yields on the last pullback to
3800 region would support the theory that these could be squeezed lower, but only marginally. Seeing CBA trade on a 12% div yield would be
like the recapitalization days of the early 90's. So it's always possible but not overly likely. Where I think our market could suffer real weakness
is in the resource sector, which has already experienced a major hit already. You can see that while a lot of the high yielding blue chips have
recently recovered, BHP and RIO have struggled to move higher with the overall market. If our bearish view on commodities is correct, and
commodity prices continue to fall then there could be some major carnage in the resource sector.
We advised you when BHP was $48 that it was likely to head towards the $36 as our market completed the C wave down this year. Well, that
was only half the story. Most of you thought I was crazy with a view of $36, so you would of thought I had lost the plot if I had said $20. But
that really has always been my belief. Most resource stocks will come under fire in 2012 and I expect something dramatic here. RIO back to
$40, FMG back to $2.50, NCM can possibly trade back to the $16-$18 zone. These are big calls, but I am adamant that 2012 is going to be a
tough year for our market and resource stocks are in for further tough times. The mining boom could be in trouble here, 25 year old men
driving Masserati's on mining wages in WA, these sort of conditions don't last forever.
2012 Forecast – S&P ASX 200
2012 Forecast - XJO
Our homework suggests 2012 will be on the back foot from the start of the year and a bear trend should stay in play until the last quarter of
2012. There is a chance of a sharp drop into the March time window and it could be under pressure very early in the year.
April which is historically the strongest of all months on our market could experience a relief rally into early May but in following last year’s cue,
it could be another sell in May and go away scenario as the market is likely to trade lower into the July window. We can expect volatility to
remain and April and August are our two most likely months for relief rallies next year.
A move towards the 3600 zone would be a more conservative target based on pattern of trend and current stock valuations but we can’t rule
out a retest of the 2009 low of 3100 as this has occurred often looking at historical precedence. A move between our red and blue lines is our
best estimate and due to our markets tendency to over react and panic into major lows, the lower line is always a possibility.
October or November 2012 should mark the end of the bearish phase and we should expect a multi-year bull market to commence from this
point. Most bull markets start at the end of the Second year or the start of the Third Year.
October 2002 was the low for most US markets last decade, the Dow Jones rallying 100% within 5 years, while the All Ordinaries made its final
low in March 2003 rallying 150% in the same 5 year period.
“Protecting your equity next year will be so significant for future share market returns”.
BHP Billiton Limited (BHP) $36.13 Monthly Chart
Looking at the monthly chart shows a strong bearish move underway. It still has the appearance of a larger corrective pattern so some sort of
retest of the low is likely but we shouldn't hold out for a new low as the 2011 high did not make a marginal new high. $28 is the first support
zone but it should eventually move near the 2008 low, late next year. The weakness to date is supporting a deep move towards the $20-22
price range as any rally so far has been extremely feeble.
RIO Tinto Limited (RIO) $67.05 Monthly Chart
It doesn't have quite the same set up as BHP but the uptrend running from 2008 low is well and truly broken and a strong downtrend is back in
play. I would expect as a minimum that the longer term support line would become our longer term target zone. ($38-40 approximately). The
big volume on the way down recently after the stock rolled over is confirmation to me that this is just the start of a larger move down and that
the bears are likely to be very committed.
Newcrest Mining (NCM) $35.85 Monthly Chart
This whole pattern since late 2007 is looking like a large corrective pattern. The marginal new high in late 2010/early 2011 looks like a false
break now. The fact that the last decline from $40 to $17 took less than a year to occur and then the ensuing rally took almost three times the
time to go back to the high should tell us the uptrend had well and truly lost its momentum. This leg down is effectively our C wave or the last
leg of a broadening formation. Whichever way I look at it, it all suggests a retest of the 2008 is a strong possibility. Normally a marginal new high
on the weekly chart set up, suggests a marginal new low also, in this case a move below the $16.45, 2008 low.
Fortescue Metals Group (FMG) $4.85 Monthly Chart
I know this stock is a market darling but a single resource stock could face some major issues if the price of iron ore continues to fall with the
rest of the other metal commodities. Iron ore was trading at $60 US dollars per Metric Ton, in November 2008 before the recent rally towards
the $187 reached in February 2011. It was back recently to $150 in October 2011.
I am suggesting that a move back to the 2010 low is most likely but we can't rule out a move lower as this stock is highly leveraged to the iron
ore price and highly leveraged with debt. The long term trend line is back around the $2.50 zone and this is a real possibility if the iron ore price
moved below $100.
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For professional and timely advice on how to maximize your returns on your portfolio please call Gary Glover at Novus Capital on
(02) 9375 0123 or email me at gary.glover@novuscapital.com.au