"Holy Cow!!!" or "All hail Robert Prechter!!!" ?

Expletives flying all over the world! Was almost a 1000 point drop in the Dow. I don't think we need a chart here, just go to any financial website. No trendlines can define what happened last session.

Is this just a computer glitch? I think it's highly unlikely. Maybe it's time to pay attention to Robert Prechter of Elliott Wave International. He's been calling for a sharp and scary drop to new bear market lows for a while now. His April Elliott Wave Theorist included a very detailed timing analysis, suggesting the dreaded P3 was imminent. Lo, and behold.... black Thursday?! 1987 repeat?

This event shows why having stops in place always, is so important. Those who were positioned on the short side, congratulations! We'll find out soon if today's action was just a glitch, or the harbinger of more serious declines. I think the latter is more likely. Sentiment definitely allows it, as posted earlier along with the long term chart.

(What Prechter's been saying for months)

What does this mean for Shanghai? It is possible that Shanghai will execute a zig-zag correction instead of the triangle, which means a retest of the 2600 area. But remember, Shanghai, unlike other Asian markets is a bad follower, and has a mind of its own. I'll update during the weekend.

Meanwhile, take care folks and all the best!

Shanghai Composite: The Broader Triangle Unveiled!

Helloooooo folks (in the voice of Karl Denninger), how's it going? Since the original triangle picture failed to materialise, some readers are fearing a deep correction here. So, what's coming next? A triangle, a complex correction, or a deep bear market? Whatever the short-term pattern, i'm bullish on the medium term for at least a test of the highs (based on EW analysis).

Before i go on to the chart, i'd like to pass a message for readers of this blog:

I'm an ordinary individual investor, just like most of you folks out there, with a passion for the markets. I do this blog primarily to help my own trading, and secondly to share with and learn from the world outside. I can be as wrong or right as your next door neighbour. At no time, should you take my posts as trading advice. We are all here to learn and hopefully make some coin. I absolutely welcome comments and criticisms - i only ask that you keep the language polite, civil and not emotionally loaded. Thank you :)

And now to the chart:

The drop has been relatively sharp, and probably got many panicked. But if one looks at the overall picture, price is still within a range since Aug'09. In earlier posts, i mentioned a possible broader triangle. Although other scenarios are possible, this is my preferred scenario for now.

The Broader Triangle

First, note the original proposed triangle bound by maroon and blue trendlines. Since the break, it cannot be defined as a triangle (as its internal structure was not complete). Second, observe that the decline (calling it wave c) from wave b high of 3350 is in 3 complex waves, and much longer than the preceding waves a & b in duration. It also fits neatly into a corrective channel (maroon & cyan). Third, note the declining volume on the sideways move.

So why am i labelling the latest 3 legs as wave c? Refer to the "bible" - Elliott Wave Principle, by Frost & Prechter - page 90, on the guidelines of a contracting triangle:

"Usually, wave C subdivides into a zigzag combination that is longer lasting and contains deeper percentage retracements than each of the other subwaves." (my emphasis)

Well, price action fits in superbly with the above description. With oversold momentum, and lower channel support, we can expect a bounce here. Tentatively sticking with the triangle scenario, and calling for a wave d up. It should be followed by a wave e down, and a thrust towards year-end.

Levels to watch

Resistance levels to the upside are at 2890 & 3100. Good support around 2700.

One of the readers asked why 2700 & 2800 levels were important? 2800 is derived by the lower channel line (cyan). And 2700 area is historical support (check out the longer term chart) and the 23.6% retrace level of the original decline. A break below that, and i will consider the alternatives.

That's my take. Feel free to contribute your views. Read my disclaimer, and take it easy ;)

All the best!

Note sure what a Contracting Triangle is? Refer to this free Elliott Wave Tutorial.

Shanghai Composite Long-Term Count

This post is in response to a request from one of the readers: the count for Shanghai Composite since the Oct08 top. Attached below are two long term charts.

Long-Term - Bearish

There isn't enough data for an even longer term count. Judging from the nature & depth of the correction since Oct'08, a wave 5 of larger degree was most likely completed at 6100, and a five wave impulsive decline followed. Notice how the decline fits neatly into a parallel trend channel. Naturally, we should expect waves B (up) & C (down) to follow. We're currently in the B wave up since Oct'09. Not expecting any new highs on this upmove, and should be moving down to test the lows in a C down within the next couple of years.

BTW, for EW buffs, SSEC seems to be making a habit of extending the 5th wave. Can you spot the two instances in the chart above?

Medium-Term - Bullish

This B wave up since Oct'09, itself should ideally consist of 3-waves A-B-C (Markets are fractals in EW theory). About a month ago, i identified a triangle B of B sideways, with a C up to follow, with an initial target of around 3900 (coinciding with the 50% retrace level).

Short-Term - Neutral

Refer to this earlier post. Heading towards a target of 3200 in D, before turning down in E.


If you're confused with all the lingo above, i'd recommend this basic elliott wave tutorial, or the elliott wave crash course video. It's free, but you may have to sign up for a free club membership, which has comes with other benefits.

Asian Rally: Who saw it coming?

Earlier i posted a Long-term Hang Seng Index chart, that actually predicted the Asian rally. But, it was not the only one!

Let's give credit, where it is due. I distinctly remember in Mar 2009, 99% of mainstream analysts and media were crying bear, and projecting absymal depths. Folks at Elliott Wave International were some of very very few, who boldly called for a "sharp & scary" rally. It always looks easy in hindsight, but it never is!

This article below reproduces some of that atmosphere:

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The Asian Rally: Who Saw It Coming?
3/18/2010

Bloomberg TV's Bernard Lo recently interviewed Mark Galasiewski, Elliott Wave International's Asian-Pacific Financial Forecast editor, about his outlook for Asian stocks. Lo pointed out that Galasiewski had accurately predicted the recent Asian rally. "If you listened," Lo said, "you made money." See how neatly Galasiewski's prediction unfolded... Read More
------------------------------------------------------------------

Well done, Mark!

News moves Markets... Right?

While we're waiting for a good trade setup, here's a free article, copied wholesale from Elliott Wave International, that you'll find very interesting. Involves one of my favourite topics - Does news move markets? Example: Greece default, and troubles in US and europe should be sending stocks & euro crashing right, but hey are they? I'd appreciate your views on this after you finish reading. Thanks! I'll be posting an SPX update later today.
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What Does NOT Move Markets? Examining 8 Claims of Market Efficiency

March 2, 2010
By Susan Walker

If everyone says that shocks from outside the financial system -- so-called exogenous shocks -- can affect it for better or worse, they must be right.

It just sounds so darned logical, right? Economists believe this trope to be true, mainly because they believe that investors are rational thinkers who re-evaluate their positions after every new bit of relevant information turns up.

Beginning to sound slightly impossible? Well, yes.

It turns out that logic is exactly what's missing from this it-feels-so-right idea of rational reaction to exogenous shocks. Read an excerpt from Robert Prechter's February 2010 Elliott Wave Theorist to see how Prechter deals with this widely held belief.

Find out what really moves markets -- download the free 118-page Independent Investor eBook. The Independent Investor eBook shows you exactly what moves markets and what doesn't. You might be surprised to discover it's not the Fed or "surprise" news events. Learn more, and download your free ebook here.

* * * * *

Excerpted from Prechter's February 2010 Elliott Wave Theorist, published Feb. 19, 2010

The Efficient Market Hypothesis (EMH) argues that as new information enters the marketplace, investors revalue stocks accordingly. … In such a world, the market would fluctuate narrowly around equilibrium as minor bits of news about individual companies mostly canceled each other out. Then important events, which would affect the valuation of the market as a whole, would serve as “shocks” causing investors to adjust prices to a new level, reflecting that new information. One would see these reactions in real time, and investigators of market history would face no difficulties in identifying precisely what new information caused the change in prices. …

This is a simple idea and simple to test. But almost no one ever bothers to test it. According to the mindset of conventional economists, no one needs to test it; it just feels right; it must be right. It’s the only model anyone can think of. But socionomists [those who use the Wave Principle to make social predictions] have tested this idea multiple ways. And the result is not pretty for the theories that rely upon it.

The tests that we will examine are not rigorous or statistical. Our time and resources are limited. But in refuting a theory, extreme rigor is unnecessary. If someone says, “All leaves are green,” all one need do is show him a red one to refute the claim. I hope when we are done with our brief survey, you will see that the ubiquitous claim we challenge is more akin to economists saying “All leaves are made of iron.” We will be unable to find a single example from nature that fits.

* * *

In his February 2010 Elliott Wave Theorist, Prechter then goes on to show charts that examine each of these claims that encompass both economic and political events:

Claim #1: “Interest rates drive stock prices.”
Claim #2: “Rising oil prices are bearish for stocks.”
Claim #3: “An expanding trade deficit is bad for a nation’s economy and therefore bearish for stock prices.”
Claim #4: “Earnings drive stock prices.”
Claim #5: “GDP drives stock prices.”
Claim #6: “Wars are bullish/bearish for stock prices.”
Claim #7: “Peace is bullish for stocks.”
Claim #8: “Terrorist attacks would cause the stock market to drop.”

To protect your personal finances, it's important to think independently from the crowd, particularly when the crowd buys into what economists say.

Find out what really moves markets -- download the free 118-page Independent Investor eBook. The Independent Investor eBook shows you exactly what moves markets and what doesn't. You might be surprised to discover it's not the Fed or "surprise" news events. Learn more, and download your free ebook here.


Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company.

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: 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!

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. :)

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.

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?

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.

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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!

Hang Seng Index: Consolidating in Wave 4

Hang Seng decline since 11 Jan so far looks like 3 waves down, and consolidating in Wave 4 of latest decline. Since Wave 2 was a zig zag, we can expect a sideways correction for this wave 4, in line with Elliot Wave principle of alternation. Expect a choppy wave 5 decline later next week down to 19000-19200 levels(the target of the head & shoulders identified in this earlier post.

Welcome!

Welcome to trendlines!

Here I hope to share with you the power of trendlines. Group human behaviour may seem erratic on a short time frame, but exhibits patterns and relationships in medium and long term frames. One of the best demonstrations occur in the stock markets, and can be observed via trendlines and fibonacci relationships. You can google 'fibonacci' for more information about this amazing concept. If you could chart any mass human activity, chances are that trendlines exist.

One of the pioneers of the 'patterned human behavior' concept was R.N.Elliot, the father of Elliot Wave Theory. Numerous websites on this topic exist too, including one by modern day Elliot Wave Theorist, Robert Prechter.

You will notice the URL of this blog includes the number 618. It is part what is known as the Golden Ratio (a fibonacci ratio). In my subsequent posts, i will try and demonstrate its existence in real life charts.

Do feel free to suggest, comment or criticize!