SGX: Analysis of Singapore's barometer

SGX is the listed name of the Singapore Stock Exchange. Although not a high volume stock, it is an excellent barometer of the financial weather in Singapore, and the region. To start off, take a look at this beautiful long term chart:



After a breath-taking parabolic rise in 2007 to a high of almost $17, came a nasdaq style plunge that took it to unbelievable lows below $4, in a span of just over an year. A nice study of sentiment right here. Rational and efficient markets, anyone?

The retrace since Mar-09 seems to have stalled just below the 38.2% fibonacci level, indicating lack of strength. Now lets take a look at a medium term chart of SGX:



The price has gapped down through a crucial support level in the 7.80 range, and sitting on the lower consolidation channel line(cyan) and minor support at 7.60. Also, note the rise in volume during the latest downtrend.

Elliot Wave Analysis

Applying elliot wave analysis, the BIG decline from 2007 was in 5 waves. So we'd expect a A-B-C retrace up. Taking the most obvious count, it looks like we did complete a 3-wave move up (with B being the sideways action from may to july). The top of this move was probably in Sep09 at 8.75. If so, a 5-wave move down has begun.

Alternate view (lower probability): The move up since march was A move, and now in a consolidation B down, with a higher C to come.

So what's the weather forecast for SGX?

Short Term: 7.6 is minor support, and 7.8 is resistance. There might be a weak rebound or sideways consolidation next week, to test resistance and support.

Medium term: A break-down is likely towards good support at 6.8 (38.2% retracement)

Longer term: A 5 wave move down to at test the lows of 3.8 is possible.

Caveat & Disclaimer

1. Elliot wave analysis & Finonacci retracements work best in high volume trades (stock indices, forex), and are not reliable for individual stocks. SGX being an important barometer, merited this post.
2. Convincing break of the blue downtrendlines in the short term negates my views.
3. The numbers quoted above are general ranges, and not exact levels.
4. This is a personal view. Please do your own analysis before executing your trades.

Your constructive comments and views are welcome. :)

US vs China: Is there a leader?

While there're a million views out there on this topic about global leadership, we will stick to the study of some charts. Interestingly,a handful of analysts have pointed out that the Shanghai Stock Exchange, SSEC seems to be leading other world markets. For evidence, take a look at the comparative chart below. Notice that the SSEC(blue) bottomed about 4months ahead of the SPX(red), and also topped about 5 months ahead. Notice that both uptrends were in 5 waves each, with the SPX uptrend more choppy(corrective look) than the SSEC.



Now, lets take it a step further. Take a look at the individual charts below. Notice the similarity in the form of the decline highlighted by the circle. Both were sudden and sharp, and both had a exaggerated "fourth" wave bump.





Now how can we project the above into the future for the S&P500? After a bit more selling, are we about to see a A-B-C rebound just like the SSEC, to test the highs? It's a very interesting prospect!

How do we trade this

Going long now does not make much sense, coz this could also be the start of a deadly Wave 3 down! Personally, i prefer the safety of cash & a few short positions at this point. Any move up is likely slower than a move down. No further action until the downtrendline is broken convincingly.

Elliot Wave International offers Free Forex week!

Elliot Wave International provides forecasts of the markets, currencies and commodities, at a price. From time to time they have a "free week" - their forecasts are free to the public for a limited time!

This time its Forex week. You can click here to access the page. They require you to sign up as a club member which is free.

In case you are wondering, i do not benefit in any way from this advertisement!

S&P500 update: Wave 3 here?

Sharp drop in the S&P500 breaking below previous lows. Wow, strong impulse down - got the direction correct, but not the intensity! This impulse down negates my suggested count. If this is the beginning of W3, we could count W2 as a simple ABC up. However, as the indexes are reaching oversold levels on daily charts as well, i will keep the "Complex correction" option open (with a deeper Wave B correction).

The action in the next few trading sessions will confirm either view. Until then, it'd be prudent to stay off any long trades in this market.

S&P500 Short-term: Rally or Rollover?

We are at a juncture where the market could go eitherways, and that is exactly what might happen today - up then down. But it is a tough call. We are neither too overbought nor too oversold. If you are thinking of an entry, this might not be the best time. Day-traders are exempted, of course ;)

I maintain my outlook from previous post. Preferred scenario in green. Short term up to test 1104, then down to 1080-1088 range. For the next week or so, I believe we are in a elliot wave complex correction upwards that may last a while. Expecting the b wave down to 1080-1088 range, before rally c up (not drawn on chart) into the weekend and next week to break 1104.

Watch for a break of the (red) trendline. Alternatively, if we breakout of 1104, next target 1110 and then 1120. A complete breakdown to new lows - least probability view.

Feel free to suggest your views folks! Thanks to Tim Knight of Prophet.Net for the charts software.

Technical Analysis: Why high volume markets?

While the markets are figuring out this correction, i thought i should take this time to explain why i analyse only high volume markets:

Technical Analysis

If you have seen technical analysis in action, you probably understand support and resistance lines, trendlines, channels, breakouts, retracements etc. What we draw and identify on charts are really the patterns of group human emotions of hope, fear, greed and denial to name a few.




National Geographic

If you've watched NG for any length of time, you are bound to have come across a wild cat hunting session. A large herd of deer initially at random motion peacefully grazing is disturbed by the detection of an intruder. Once the cat makes its charge, you'd expect the deer to scatter away in all possible directions depending on where they were facing. But they don't! They all run in a group in a direction determined by a critical mass, each trying to get to the centre of the pack. It's almost as if they are all of one mind and body. This is the classic behaviour of Herding. And this, is what Elliot Wave Theory defines as the basis of mass human behaviour too. In the modern age, we dont see each other on the trading floor, but use other cues such as price and volume, big buyer actions, insider trades, etc etc. Human behaviour suprisingly involves a lot of subconscious instinct - a lot more than we imagine. A football match in England in the stands, or a mass procession in thailand would be great places to study mass human behaviour.

Volume & Velocity

In physics, we learn that Momentum = mass x velocity. Well in the markets, its Volume x Velocity!

Velocity: It is easier to follow and trade Impulse waves which have a high Velocity. They are waves of Instinct - hence quick and clear, whereas a Corrective wave is a wave of Second Thoughts, conscious reflection - hence slow & muddled.

Volume: The bigger the group, the greater the momentum and the greater the predictive power. Fibonacci retracements which exist in nature's design (and hence in human design), show up beautifully in charts where there is a high volume of trade. I will probably cover this amazing concept(fibonacci) during another correction!

Market Manipulation

A word on market manipulation. There's been lots of talk in the markets recently about conspiracy theories - Bernanke crashed the markets in '08, Goldman pulled the rug in Jan'10 to get Obama to reverse the anti-banking policies. My humble opinion - humans love conspiracy theories! Market manipulation is a remote possibility in low volume markets and that too over very short time-frames. But everywhere else, it is just drowned by the deafening noise of the crowd! I do believe markets react to triggers(news), but only when they are ready to do so. A very overbought market will take any excuse to correct down, and vice versa.

Conclusion

Technical analysis works best in high volume markets, where no one single player is big enough to dictate the direction. If you've seen the trendlines on my charts so far, that is proof enough of the existence of mass human patterns - as these indexes are made up of thousands of stocks from many sectors. Trendlines are generally harder to draw on low volume indexes or stocks.

Now whether we are able to discern these patterns and apply them for successful outcomes is a whole different ball game!

Comments? Questions?

S&P500 Short-term: What's next & Resistance levels

Nice 3 wave rise so far to 1104 area as suggested in previous post. So what's next? Corrections are always complex affairs, making trades difficult. Here are some possibilities:

1) On the 60-min charts, SPX is very overbought. And coupled with the fact that 1104 is serious resistance, there is a possibility of some consolidation today - maybe a 3 wave down(as shown in green). After that, we may go higher to push the daily charts into overbought before any serious selling. Fibonacci resistance levels at 1110 and 1120. But i feel we need some kinda selling before we can get there.

2) We break higher today(making it a five wave move) to 1110 before consolidation, then a five wave move up to 1120.

3) We break down here below 1070 for new lows.

Scenario 1(shown in green) is my preferred view. Now lets sit back and watch the show!

S&P500: Short Term target 1104

SPX broke out of short-term downtrendlines, and formed a nice inverted Head & Shoulders pattern. Short-term target for rebound: 1104. Its already more than halfway there. If it is a simple correction upwards, it should be followed by an impulsive decline below previous lows.

Watch that red trendline for a break.

Shanghai Composite: Bouncing On Support

Shanghai Comp now sitting on support of blue channel line. A weak bounce today, followed by an almost complete retrace. Expecting an ABC style correction up over the rest of the week. Depending on the strength of the bounce, we may reach 3020 or 3050 (38% fibo retrace) as shown by the two arrows. After that i do expect a further decline in the area of 2700 with a possible breach of the lower blue line, as highlighted in this earlier post.

SSEC is facing downward pressure in the medium term.

US Markets: Almost due for a rebound

Unlike previous trend based analysis, this call is based purely on sentiment. And in my experience, sentiment is THE factor that rules the markets, causes waves, patterns and trendlines.

Here i attach a chart of the Bull/Bear Ratio, courtesy of Investors Intelligence:





Notice the plunge in sentiment off the highs, caused by the rapid selling in such a short span(a surge of FEAR). Generally, the more bullish ordinary folks are, the higher chances of a bear market. With the ratio plunging to almost half its value, it is hard to forsee a precipitious drop from here. It might be scary tonight at the open, but i suspect it wont get any worse over the week(low probability). To add to that SPX500 seems to be completing 5 small waves very shortly.

--------------------------------------------------------

As an aside, note the previous high for this indicator was around Nov07, just after the peak of the bull market. And guess where was the lowest of lows? We could be forgiven for assuming it would be at the March09 lows! It was in fact sometime in Nov08. As is well known in Elliot Wave Theory, the peak of the pessimism actually happens in Wave 3, thus causing a divergence between sentiment and prices in wave 5.

Now for the exciting part. Let us assume this Jan10 top was the top of the current bear market rally from last March(if that is what it is). If we extrapolate the above logic to the current drop: In the rebound to come, the BBR ratio should reach close to the Jan highs if not exceed it while the price stays below. However, do note that this may only happen at the rebound at one higher degree. Meaning, a rebound off a 5 wave decline below SPX 1000 range. That would be a beautiful divergence to confirm the medium term top.

Before we get excited and start using this ratio as the 'ultimate' trading tool, let me conclude that sentiment does not share a linear relationship with stock prices. Different extremes can be reached at differing degrees of market waves, and one needs a close examination of previous market cycles in order to use this ratio as a predictive tool with any degree of success.

I will, of course update the blog with sentiment analysis if we do get sub-1000 on the SPX in 5 waves and rebound. Meanwhile, hang in there amigo!

Shanghai Composite: Expecting a rebound (short term)

Self explanatory chart. Still expecting a wave down to around 2700, or a triangle before big gains. Comments?

Bombay SENSEX: Sensing a decline to 15400

Sensex has broken through all uptrendlines, and is gonna trend down for a while. Currently looks like a wave 4 consolidation just like Hang Seng. Final target for current decline is 15400, which is good support as well as the 23.6% retrace of the entire uptrend.