Russell 2000: Gunning for 765? UPDATED

Ok, so we have been going up on overbought for a while now. What do we learn from that? Price action is primary, while wave counts & indicators are secondary. The simple truth is price-and-only-price determines whether you make or lose money! When in doubt, respect the prevailing trend. But hey, who can resist the thrill of calling the future - of being the next Nostadamus!

So here goes. Russell 2000 has been on a tear. Check out the hourly:

In the very short-term, it's up against upper channel resistance, and likely to see a correction. Initial supports at recent high of 725, followed by 700 level. Now let's examine the daily:

Note the medium-term upper channel line in grey, converging with the solid resistance level of 765 - a formidable barrier. It's likely to be a good place for some much needed pause.

On a weekly chart, the advance looks impulsive, and has broken above the downtrendline. Any brave souls who'd like to suggest a wave count here, are more than welcome to do so in the comments section - impulsive or otherwise.

The short-term trend is still up. Guard your positions wth stops always. All the best folks!

Asia & South East Asia: Birds of the same feather?

Here's two 5-year charts, poised at very interesting junctures:

Dow Jones Asian Titans Index

Dow Jones South East Asia Index

At first glance, these two birds of similar feathers, seemed to have flocked together under trendline resistance. A closer examination reveals the superior performance of S E Asia in terms of retracement. Do note that Japan makes up a large percentage(50%) of Asian Titans.

There are possibilities at this stage. A break above the topline would indicate a retest of all time highs in the medium-term. A consolidation below the line, over the next few months, might setup huge Inverse Head & Shoulders patterns over the longer time frame. I'll be keeping an eye on these charts for sure.

Stay tuned!

EW enthusiasts might wanna comment on the form of the decline & rise in both these charts (corrective or impulsive?). What does your Elliott eye see?

Useful Links

DJ Asian Titans Index

S&P500 short-term: Two Scenarios

In the comments section of the last post, i mentioned that SPX is unlikely to exceed recent highs, and might be in a range for a while. Here's two scenarios:

1. Barrier/Contracting Triangle = sideways + more upside (Target: 1234)

After what looked like an impulsive decline, prices retraced a good portion of it, before going sideways in a contracting range. This could be a triangle with a-b-c-d legs complete. There could be an e wave down, towards 1197/1190 followed by a thrust up towards 1234. An initial move down, followed by a sustained break above 1204 will confirm. A clean break below 1190 will make scenario 2 more likely. Check out the elliott wave tutorial if you like more info on the different forms of triangles.

2. Impulse wave 3[C] down next (towards 1150)

A closer examination of the 5-min chart below, lends support to this view. First move down from 1204 could be impulsive 1[A] down. Subsequent moves could be counted as a corrective (a-b-c) wave 2[B] up - that finished yesterday - with  waves 3[C] down, 4 up & 5 down to follow. A break below 1190 will confirm. Support at 1176, followed by strong support around 1150 area - previous high & rising long-term trendline(white). Letters in [brackets] reflect the alt count, catering for the possibility of only a 3-wave A-B-C move down.

In either scenario, the initial move should be down. And we're closing in on some kind of a top(short/medium-term) here. All the best!

Shanghai Composite: Bullish TRIANGLE still intact

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

Note: I've changed the triangle internal notation to (a-b-c-d-e) to distinguish from the A-B-C of higher degree.

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.

As you can see from the chart above, all the rules are still intact. Following the third rule above (and assuming my count is correct), wave e has until 2890, before the triangle reaches dodgy territory.

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

• How to calculate the thrust target of a triangle
• Elliott Wave Tutorial
• Free EW Video

All the best!

S&P500 short-term: Impulsive Decline!

Thursday, the market showed surprising strength, and i remarked on a comment thread, that this might be an exhaustion gap on the small cap index. Friday, the markets were overdue for a correction, and would have gone down on the slightest excuse (Goldman or not!), and they did. The decline was impulsive suggesting more downside ahead towards 1176. We are surely at a significant short-term top, but whether it's a significant medium-long-term top remains to be seen.

Head & Shoulders

First thing to take note is the red channel break. Then, SPX got oversold, and bounced right off an important short-term trendline (purple). Price is forming a slightly declining Head & Shoulders, with left shoulder at 1200, head at 1214, and right shoulder at 1198. If it works out, we can expect a decline towards 1176 area initially. Good support is at 1150 area. A break of 1200 upwards, may retest the highs at 1214.

As an aside, RUT looks like it has a bit more upside to go.

Short-Term Trading Idea

I may take a short-position right here with a stop just above 1200, and a target of 1176.

Latest EWT

So is this the start of a regular correction at the end of wave 5, with more upside to come? Or is it the end of a corrective C of some kind, with serious declines ahead? The latest Elliott Wave Theorist, from Robert Prechter of Elliott Wave International, presents a very impressive, and comprehensive timing analysis going all the way back to the 1900s. Here's an article which drops a few hints as to the content. Without giving away too much, he explains the surprising strength of this "rally", why a very significant long-term top for US markets may be close at hand, and the nature of the declines to come. No one can predict the future 100%, but this newsletter is definitely worth a read. :)

As most of my trades are in the short-medium term, i'll stick mostly to analysis in these time frames. Will be posting again with an update of sentiment, and slightly longer-term charts, after watching the current decline. Meanwhile, keep in mind that the medium-term uptrendline is at the bottom of the chart (in grey).

As always, be safe and remember to use "protection". All the best!

Shanghai Composite Short-Term: Wave D has ended

Last post called for one more high towards 3200. Since then prices reached a high of 3181. Shanghai today broke down through its short-term uptrendline, thus signalling the end of Wave D. Expecting downwards-to-sideways movement in Wave E for the coming weeks. Thereafter, we can expect a thrust out of the triangle, higher. Sustained break below 3000 will negate this view. Refer to previous posts for the bigger picture.