Shanghai Composite Medium Term: A BULLISH Scenario

Hope you are having a enjoyable weekend so far. Re-examining the nature of the decline on the Shanghai Composite(SSEC) since Aug'09, i'm compelled to offer this BULLISH scenario medium-term. Let us first start with a longer-term chart:

The decline from its all-time high was impulsive in 5 waves. With the break of the downtrend channel, there was a sharp reversal(a 5-waver) with a blow-off top around 3400 (38% retrace). Since then, there was a sharp decline, followed by reversals up and down - essentially a sideways movement. In the long-term, we may be headed down to the lows, but in the medium-term there could be a c wave up of an a-b-c coming.

Now let's zoom in and examine the action since Aug'09.

The initial sharp move down(A) was a 3-wave move, very similar to what happened in the S&P last month (leading to my Shanghai Connection Theory). B was a 3-wave up, and C a very choppy 3-waver down so far.

A TRIANGLE in the making?

Please read through my earlier post - Elliott TRIANGLE explained - this action looks like a triangle in the making. If we break through the lower blue line to 2750 area, all bets are off & this could be something else totally different.

Very Short-Term

In early Feb, with the index reaching 2950 level, i called for a rebound in the very short term, in two postings, with a target of 3020-3050. Since then, prices have clawed back up to the 3020 level, and facing channel resistance. If we break through to the upside, resistance levels are 3050, 3150 and 3200 or wherever the upper trendline falls.. A break below the lower line may find support in the 2750 area.

Note that the "predictive" lines drawn on the chart are compressed in slope due to space constraint.

Conclusion

If the triangle scenario materialises, we're looking at a possible medium-term target of 4400 on the SSEC, with intermediate resistance at 3900. However, as prudent traders, watch both trendlines for a break either way, and place your stops. Remember, an early break below the lower trendline will cancel this scenario.

Implications for S&P500

SSEC is seemingly leading the SPX so far in behaviour by 4-5months. Elliott Wave Theory recognizes the fractal nature of markets. And since mass psychology of human beings is similar - with slight regional variations - could we expect a similar move sideways followed by higher, for SPX in the medium term? SPX has so far been exemplary in its copycat decline since Jan!

As always, correlations only work as long as they work! Mind the price action, and mind the trendlines.

Your participation and comments are most appreciated.

EWI offers FREE Global Market Perspective!

Dear Readers,

It's that time of the year! For a limited time - until march 2 - Elliott Wave International is offering FREE access to its latest Global Market Perspective. It's like a 100-page pdf file with analysis of all major world markets, currencies, interest rates, etc - basically it's almost all of their services condensed together.

As an avid e-waver, i'd strongly recommend that you check it out, whatever markets you trade in. Click here to access it for free.

All the best folks! I'll be posting my outlook for next week during this weekend.

Trendlines

Note: I may get a small credit if you use my link above & sign up for any of their paid services, but i'd strongly recommend it even otherwise :)

S&P500: Consolidation ahead - Update

No change in outlook since last post. In the last session, the market was in a wave iv sideways consolidation, expecting a small spike up into the 1105-1110 range, before a reversal down. We're still overbought short-term, so expecting 1110 (61.8% retrace) to be the max upside.

Once again, ignore my wave-count, and watch the trendlines and price action.

S&P500 short-term: Consolidation ahead

Folks, broke through the congestion area and reached my ideal target area of around 1095 yesterday, based on A=C. It's upside movement is limited by the uptrending channel drawn, and overbought conditions in the near-term.

As is typical in a retracement, we shouldn't be suprised if it tries to retest the 1105 level, and even exceeds by a bit. Then, price and sentiment wise, we'd be better setup for more downside( a possible wave iii or C) after a spike or two. Consolidation is definitely on the cards within the next couple of trading sessions. So i'll be watching the above trendlines and their extensions, to study the extent of it.

I leave you with this reminder of what happened in Shanghai in Sep'09, as a possible alternative scenario.

Good luck!

Hang Seng Index: Serious Resistance Ahead

In a previous post, i'd highlighted the Head & Shoulders pattern in the HSI, and suggested a target in the 19200 range. Subsequently, another post identified a wave 4 consolidation, suggesting a reversal might be at hand. Since then, the index hit a low of 19400, turned around rapidly, and broke through the downtrendline since Jan 2010.

HSI is currently in overbought territory and testing the neckline of the H&S at 20750 - serious resistance. I am expecting a consolidation here if not an outright reversal back down.

Main levels to watch

Resistance: 20750 and then 21000.
Support:  19400. A break below might take us down to 18600, 17200 & 15800.

Correlations

The pattern since Jan 2010 has been very similar to the SPX. In the medium term, there is a lower probability scenario that the decline was a 3-waver, and a test of the highs is ahead. On the other hand, Shanghai Composite which has a huge influence on Hang Seng, is also at a channel resistance, supporting the view expressed.

In conclusion, i expect 20750 to be stiff resistance in the short-term, and expect some downside for this week.

S&P500: Keeping it simple

Tremendous buzz going on in elliott wave circles around the world, since the friday rebound from a week ago. Is this a new impulse up, a zig-zag, double zig-zag, triple three? Corrections are complex creatures, and thus generate the most amount of discussion

A Word about Elliott Wave Theory

Elliott Wave Theory, first chanced upon by the legendary R.N.Elliot, is an elegant tool which provides a framework from which to look at the market. It's beauty lies in its ability to relate wave forms to mass human emotions of fear and greed. Let's face it: NO ONE knows the future for sure. Obviously, elliot wave structures in real life do not look like the idealized forms and have many variations, making predictions difficult, especially in real-time! Hence, it has limited predictive ability, and is to be used as a framework and a guide to make "higher probability" trades. If anybody, anywhere, has found a 100% tool, we'd know the future and there'd be no trades, no traders and no markets - impossible! Personally, i find it very useful in conjunction with price action, and a few other indicators. Different strokes for different blokes :)

Keeping it simple

So this week, let's keep it simple without getting too caught up in counting waves. I suggest you ignore my proposed count below, and focus on the trendlines and price action.

Trend:

Medium-term: down
 - the relative form, veloctiy and magnitude of the down vs up movement, since January.
 - very corrective nature of uptrends.

Short-term: up
 - initial sharp upmove from Fri 5 feb, followed by a very choppy uptrend, bouncing on the bottom trendline.
 - break of the downtrendline from Jan.

Very Short-term: sideways

A Word on Sentiment

For those folks calling for a wave 3, a quick question: How does a wave 3 generate its deadly power? For one, it does so by sucking in hoards of buy-on-dippers on wave 2, by generating a pink cloud of super feel good optimism and hope, before executing a shocking about turn into a seeming abyss. Neither the recent price action, nor the pigs-in-europe news, supports a wave 3 sentiment setup in my humble opinion. Not yet!

How do i trade this

Depending on our time-fame - in a corrective phase, it might be best to sit on the sidelines and wait for a resolution, or keep with the larger trend. It is dangerous to go against the main trend, as you never know when the correction's gonna break.

In the short-term, a break of the lower trendline might lead to a test of 1045, while a break of the upper trendline might chance the 1105 level. However, as we've broken thru the Jan downtrendline, i'll be keeping a short-term bullish bias, unless 1045 is taken out decisively. Possible initial down this week, followed by recovery.

As always, keeping an open mind either ways. Good luck!

Elliott Wave - TRIANGLE explained

Markets are closed and its a nice long weekend, especially here in Asia. After the fun and games, its time to polish up some basic concepts.

Today i'm gonna describe the Elliot Triangle. From Elliott Wave Theory, we know that Triangles are corrective structures, and usually happen just prior to the final wave of a sequence. Typically they are found at: wave 4 of an impulse or wave B (or X) of a correction. So this implies that they do warn of an impending REVERSAL of direction at one degree above.

Here's what they look like in idealized form: (Image courtesy of elliotwave.com)

Features

1. It's a continuation pattern in the short-term, meaning the subsequent wave(the thrust) takes the same direction as the wave before the triangle.
2. After the thrust, there is usually an equally quick reversal.
3. Each small wave A-B-C-D-E subdivides into three smaller waves.
4. The target of the triangle(starting from end of E) is typically equal to the height of the widest part of the triangle.
5. Wave E is sometimes known to do a head-fake before reversing.

Thursday's Triangle

Here's another look at Thurday's triangle - a real life example identified in real-time.

Notice the whole B wave was a triangle, and C was an upthrust whose target was only slightly short of the ideal height. And we all know what happened on Friday - quick reversal!

So what's ahead?

As mentioned above, Triangles typically indicate an impending reversal in the trend. So we should be heading down in some kind of wave iii down, right? Highly likely.

So why is the 'C?' label up there? Something else also happened on Thursday - we broke through the downtrendline from January. And on Friday, we managed to stay above it end of the day. This might have some implications. I will be posting an update tomorrow with the different scenarios and trendlines.

Stay tuned!