The Toronto Index

03/25/08 11:12:04 AM

by Koos van der Merwe

Movement in the TSX300 index is heavily influenced by movement in the oil and gold prices. As both fell, so did the TSX -- is the index now a thing of the past?

Security: TECT-T
Position: Buy

Figure 1 shows an Elliott wave count starting from October 9, 2002. The count looks good, which is the first rule of Elliott wave analysis. As you can see on the chart, wave C down bottomed within the fourth wave of lesser degree. This suggested the start of a new bull market for the TSX, which then rose in a wave I to 13873.89 from a low of 12119.87. From this high, it then fell in wave II to find support at 12456.03, the high of wave III from the previous wave count.

FIGURE 1: TSX. Here's a wave count of the TSX300 index.

Graphic provided by: AdvancedGET.

Wave 1 = From the low 12119.87 to 13873.89 = 1754.02
Wave 2 = From the high 13873.89 to 12456.03 = 1417.86. This is an 80.83% retracement of wave I. I have found that wave IIs are usually a 72% retracement of wave I, with a wave III then being a 1.618% or greater retracement upward. However, since the wave II fall was greater than 72% it does suggest that the wave III rise could be a failure -- by this I mean a rise equal to or less than the rise of wave 1. Should this occur -- and let me be frank, it very much depends on how the recession in the US resolves itself -- then wave 5 will be less than wave III. This is the primary scenario at the moment.

A wave 3 target would therefore be 12456.03 + 1754.02 = 14210.05. Finally, remember that a bear market is usually a 38.8% fall of the rise of waves 1 to 5. This does suggest that my ABC count could be optimistic, because of time, and that the present rise to wave 1 and fall to wave 2 could be the completion of wave I down and wave 2 up of wave C (shown in green). One should not forget that major c-waves fall in a five-wave correction. This would put the end of the bear market in April 2009.

For the moment, until proven otherwise, I shall remain bullish, but will change my count without hesitation as and when the situation changes.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.