The Australia Market Report

By: Robert McHugh | Fri, Aug 18, 2006
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The Australia SPASX 200 fell 3.4 points Friday, August 18th, 2006 in as flat a trading day as you'll find if the market is open. Volume was 103 percent of its 10 day average with downside volume leading at a weak 44 percent, declining issues at 54 percent, and upside points leading at 54 percent. Demand Power was flat, no change, at 393, while Supply Pressure was also flat, no change, at 398. Both key trend-finder indicators remain on "buy" signals Friday. The Purchasing Power Indicator, a measure of supply and demand momentum, was flat at 79.93. The 30 day Stochastic Fast comes in at 53.50, above the Slow at 43.78. The Stochastic measures breadth momentum. These are momentum signals, and they are designed to find entry points with a high probability of finding a new trend that moves 2 percent or more.

A 2 percent move in the cash index can easily translate into a 30 percent or better move in an options market transaction. Exiting is up to you, based upon your financial position and risk appetite. Trends are about momentum, and these indicators have an amazing record of finding them. One strategy that many folks like to play is to take a position the day after both indicators first agree on a new signal. Then target a profit and get out. They only invest an amount they can afford to take a total loss on, so only invest a small portion of their speculative investment portfolio at a time. Some apply stop losses, although stops almost always get hit in the options market, so you may be forfeiting any risk profit. Some simply set a "get out" level if prices move the opposite way. These trend-finder indicators often find trends that last 2 to 4 weeks. Some are shorter, some longer.

But we have found, based upon our 30 years of trading, that momentum is a great way to find a sustainable trend with a high probability for profits. Our signals find those high momentum trends early, and are designed to ignore minor trends with weak momentum. Elliott Wave does not find momentum as accurately. That is not to say we do not like Elliott Wave, because we do. It is just that we do not trade off of EW, we trade off the key trend-finder signals. The value in EW analysis is we are making a map, improving it the further along we go, based on the latest information. It's a picture of where we are headed, but when is better left to the Purchasing Power Indicator and Stochastic signals. We supplement the "when" analysis with Fibonacci phi mate and cluster date analysis, and the percent above analysis, for potential early clues. We prefer to trade off our key trend-finder indicators, not off of Elliott Wave or other TA tools.

Australia SP ASX 200
Date Closing Price
SP ASX 200
Power Indicator
Aug 11 4,949.20 Down 1 to 376 Up 1 to 406 Flat 0 at 70
Aug 14 4,971.30 Up 3 to 379 Down 3 to 403 Up 1 to 71
Aug 15 4,936.00 Down 3 to 376 Up 5 to 408 Down 2 to 69
Aug 16 4,961.90 Up 2 to 378 Down 2 to 406 Up 1 to 70
Aug 17 5,055.90 Up 16 to 393 Down 7 to 399 Up 10 to 80
Aug 18 5,052.50 Flat 0 at 393 Flat 0 at 398 Flat 0 at 80
Summary of McHugh's Proprietary SP ASX 200 Buy/Sell Signals Fullest Extent of
  Index Term Signal Date
Last Given
Index Move
Since Signal
Purchasing Power Indicator SP ASX 200 Short Buy July 25, 2006 Up 63 Points (1.3 %)
30 Day Stochastic SP ASX 200 Short Buy July 27, 2006 Up 48 Points (1.0 %)

The SPASX200 is close to completing wave {2} up, which means a sharp decline is coming. This is based upon the completion of a Rising Bearish Wedge termination pattern from March 2005 through May 2006. What bothers us for the Bearish case is the possibility that the decline from May 10th to June 14th may be a three wave move. If so, then one of two alternate scenarios could occur, both Bullish, one Bullish short-term, the other Bullish Intermediate term.

The short-term Bullish alternate scenario is shown next, labeled on the alternate line. It suggests June's bottom was wave d and we are starting a final wave e up to a major top. The intermediate-term Bullish alternate scenario is the last chart shown. It suggests the move from May 10th is a completing Symmetrical Triangle for intermediate degree wave 4, and that intermediate wave 5 up is coming next. That could last several months, but the rise must be shorter than waves 3 or 1 were to comply with Elliott's rules.

We do not have enough confidence in the alternate scenarios to rank them higher than alternates at this time, but they are out there so we present them for your consideration.

The 10 day average Advance/Decline Line Indicator rose to positive +15.1, is trending up, and is close to generating a new "buy."

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Bottom Line: The next major wave down, {3} down, could come at any time, but wave {2} up has morphed into something more complex, our alternate labeling shown last Friday. We will know when {3} down is underway when our key trend-finder indicators turn to "sells."

"Before Me there was no God formed,
And there will be none after Me.
I, even I, am the Lord;
And there is no savior besides Me."

Isaiah 43:10, 11

An Exchange Traded Fund for Australia is symbol EWA



Robert McHugh

Author: Robert McHugh

Robert D. McHugh, Jr. Ph.D.
Main Line Investors, Inc.

Robert McHugh

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.

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