Slightly over two months ago, this blog was one of the first to identify a bullish medium-term scenario for the Shanghai Composite Index. Last post identified the end of wave d of the triangle. Price went on to collapse 4.8% impulsively , even breaking below the lower trendline. Does that action negate the triangle? So i went back to the ultimate resource for Elliott Wave Theory (Elliott Wave Principle, by Frost & Prechter) for a refresher of the rules & guidelines. And it turns out that the triangle scenario is still intact, as long as price stays above 2890 on this leg down
Click here for an earlier post on what an idealized triangle should look like.
Rules of a Contracting Triangle
- A triangle always subdivides in 5 waves
- At least 4 of them, each subdivide into a zigzag or zigzag combination
- Wave c never moves beyong the end of wave a, wave d never moves beyond the end of wave b, and wave e never moves beyond the end of wave c
- A triangle never has more than one complex subwave, in which case it is always a zigzag combination or a triangle.
What's next?
Very short-term, we can expect an extended period of movement with sideways bias, before thrusting upwards towards 3900-4000 area. Longer-term, the picture is still bearish for SSEC. A break below 2890, and i will have to review the entire scenario.
How can SSEC go up, if world markets are topping?
There's always the question of correlations. Let me illustrate with this chart below (courtesy of Reuters):
The bottom of the chart shows the correlation between SPX & SSEC. Overall, while the rest of the world follows US markets more or less, note that the correlation varies quite a lot between these two indices (eg: Oct08-Feb09, Jun09-Aug09). We were in a period of higher correlation for the past few months, and it may be about to end.
Some useful links
All the best!
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