the week ahead for major stock indices 04 apr to 08 apr 2016 1804282016

 Key Takeaways

• Last week, all the major stock indices (Hang Seng, Nikkei 225, DAX) have declined and broke below their intermediate supports to confirm a potential end of the countertrend rally from 11/12 February 2016 lows.
• The only stock market that remains strong is the U.S. where the S&P 500 has failed to make any breakdown and continues its ascend.  From its 11 February 2016 low, the S&P 500 has rallied by 15% and it is the best performance without any significant pull-back since the previous rally from the low of 15 October 2014 to the high of 05 December 2014.
• Despite this on-going relentless rally seen in the S&P 500 (the only major index that is still holding the fort for the bulls), technical elements are still showing signs of upside exhaustion. The key medium-term support to watch will be at 2052.
• Market participants will now turn their attention to the U.S. Q1 2016 earnings session that unofficially kick starts on 11 April 2016.
•  Based on the latest data from Factset, analysts have projected another decline in earnings growth of -8.5% for Q1 2016. If actual numbers turn out to be a decline for earnings growth in Q1 2016, it will be the first time the S&P 500 has seen four consecutive quarters of Y/Y decline in earnings since Q4 2008 through Q3 2009 (the aftermath of Great Financial Crisis).    

Nikkei 225 – Potential short-term rebound below 16590 resistance before another downleg

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Key Levels (1 to 3 weeks)

Pivot (key resistance): 16590

Supports: 16570/600 & 15370

Next resistance: 17315

Medium-term (1 to 3 weeks) Outlook

The Japan 225 (proxy for the Nikkei 225 futures) has shaped the expected bearish breakout from its “contracting/symmetrical” range configuration in place since the 15 March 2016 high. Please click on this link for a recap on our previous weekly technical outlook/strategy.

Since two weeks ago, we have been stressing that the 17% rally from the 12 February 2016 low of 14780 is countertrend in nature and exhaustion signs have been detected in the Index and the USDJPY. Last week’s price actions have confirmed the end of this countertrend rally with its potential top at 17315.

The long-term (weekly) RSI oscillator that measures price momentum is still bearish as it remains below the 50% and the key trendline/pull-back resistances. In addition, the daily (medium-term) RSI oscillator has broken below its first support (pull-back) and still has room for further downside before reaching its second support (trendline).

Even though, downside momentum as seen in the RSI oscillators remains intact in both the long to medium-term horizon but in the short-term (multi-days), the price action of the Index now shows a risk of an upside pull-back as it has already shaped a steep decline last Friday, 01 April 2016.  This upside pull-back expectation is supported the 4 hour Stochastic oscillator which has just exited from its oversold region and still has ample room for further upside before reaching its extreme overbought level.

The key medium-term resistance will be at 16590 which is the pull-back neckline of the “Head & Shoulders”/ “contracting range” bearish breakout. The medium-term support remains at 15750/600 which is defined by the swing lows area of 17 February, 24 February and 01 March 2016, potential exit target of the impending bearish “Head & Shoulders” breakout and the 61.8% Fibonacci retracement of 12 February 2016 low to 15 March 2016 high of 17315.

Elliot Wave count is unclear at the moment as it can be very bearish where the wave X of a double zig zag has ended at the 15 March 2016 high of 17315 and right now the Index is shaping an impulsive five waves impulsive movement to complete wave (a) of the second leg of the zig zag (intermediate degree) which eventually will break the low of 12 February 2016.  In another potential scenario, the Index is still likely to shape a potential decline but in three waves movement (a/, b/, c/) to complete wave (b) which is a potential 61.8%/76.4% retracement of the recent countertrend rally from 12 February 2016. Thereafter, another countertrend rally should materialize to complete the wave X of a double zig zag.  In both of these scenarios, the Index is still likely to shape a medium-term decline first. Thus we are keeping the options for the wave count open and adjust accordingly when new elements arise at the 15750/600 support zone.

For this coming week, we are maintaining our bearish bias for the Index and tightened the weekly (medium-term) pivotal resistance to 16590 which should cap the potential short-term rebound in price action before another downleg occurs to target the 15750/600 support with a maximum limit set at 15370 (76.4% Fibonacci retracement of 12 February 2016 low to 15 March 2016 high of 17315).

However, a clearance above the 16590 weekly pivotal resistance is likely to negate the bearish tone to see a squeeze up to retest the 15 March swing high area at 17315.

Hang Seng Index – Bearish tone remains intact below key 21000 resistance

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Key Levels (1 to 3 weeks)

Intermediate resistance: 20730

Pivot (key resistance): 21000

Supports: 19800/500 & 19100

Next resistance: 22300

Medium-term (1 to 3 weeks) Outlook

The Hong Kong 50 Index (proxy for the Hang Seng Index futures) has attempted to push higher but was rejected at the 21000 weekly (medium-term) pivotal resistance.

Technical elements ended the week on the negative side. Firstly, the Index has remained below the pull-back resistance of the ascending channel bearish breakout and the trendline resistance that has linked the lower highs since 23 October high of 23530. Secondly, the daily (medium-term) RSI oscillator has tested and staged a retreat at its key resistance the second time where prior price action has reversed down in the past two occasions on 23 October 2015 and 26 May 2015 respectively(highlighted by the pink ovals on the daily chart).

The shorter-term (4 hour) Stochastic oscillator has dipped and it is coming close to its extreme oversold level, thus the Index may soon shape a short-term rebound in price action.

Overall, we are maintaining the bearish bias that the countertrend rally cycle from the 11 February 2016 low of 18056 is likely to have ended below the 21000 weekly (medium-term) pivotal resistance but a short-term rebound cannot be ruled out first towards the 20730 intermediate resistance. Potential downside target remain at the 19800/500 support zone which is defined by the swing low areas of 03 March, 09 March & 11 March 2016 , the neckline support of the bullish “Inverse Head & Shoulders” bullish breakout and the 50% Fibonacci retracement of the recent rally from 11 February 2016 low to 30 March 2016 high of 20988  with a maximum limit set at 19100 (the minor swing low area 29 February 2016 & the 61.8% Fibonacci retracement of the recent rally from 11 February 2016 low to 30 March 2016 high of 20988).

On the other hand, a clearance above the 21000 medium-term pivotal resistance is likely to invalidate the bearish expectations for a further squeeze up towards the next resistance at 22300 (the swing high of 11 March 2016).

FTSE China A50 – Maintain bearish bias below 9840

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Key Levels (1 to 3 weeks)

Intermediate resistance: 9700

Pivot (key resistance): 9840

Supports: 9400 & 9180/9080

Next resistances: 10310 & 11100

Medium-term (1 to 3 weeks) Outlook

Last week, the China A50 Index (proxy for the FTSE China A50 futures) has traded sideways below the 9840 weekly (medium-term) pivotal resistance.

Technical elements are still negative. Firstly, the Index has remained just below the 9840 resistance which is the neckline of the “Double Top” bearish breakout and now the pull-back resistance of the former short-term trendline support from 29 February 2016 (in dotted brown on the 4 hour chart).

The 4 hour Stochastic oscillator has reached its overbought region and it is now oriented to the downside with ample room before reaching the extreme oversold level. The medium-term support remains at 9180/9080 which is defined by the swing low area of 11/15 March 2016 and the 50%/61.8% Fibonacci retracement of the last up move from 29 February 2016 low to 21 March 2016 high of 9885.

We are maintaining our bearish bias as long as the 9840 weekly (medium-term) pivotal resistance is not surpassed for a potential downside swing move towards 9400 before 9180/9080.

However, a clearance above the 9840 medium-term pivotal resistance may negate the bearish tone to see a squeeze up towards the next resistance at 10310 (200-day Moving Average).

DAX – Bearish tone remains intact below 9930/10130

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Key Levels (1 to 3 weeks)

Intermediate resistance: 9930

Pivot (key resistance): 10130

Supports: 9750, 9480/395 & 9255/120

Next resistance: 10630

Medium-term (1 to 3 weeks) Outlook

Last week, the German 30 Index (proxy for the DAX futures) has staged the expected bearish breakout from the “Ascending Wedge” and hit our first downside target at 9750 (printed a low of 9673 on last Friday, 01 April 2016) before it staged a rebound in the U.S. session. Please click on this link for a recap on our previous weekly technical outlook/strategy.

Since two weeks ago, we have been stressing that the 16% rally from the 11 February 2016 low of 8696 is countertrend in nature and exhaustion signs have been detected in the Index. Last week’s price actions have confirmed the end of this countertrend rally with its potential top at 10130.

The daily (medium-term) RSI oscillator is now looking vulnerable on the downside as it is now testing the pull-back support and the 50% level. The price action is now still holding above the 9750 intermediate support which is defined by the swing lows area of 17/23 March 2016. In addition, the short-term (4 hour) Stochastic oscillator has not reached its extreme overbought level. Therefore, as long as the 9750 intermediate support is not broken, we cannot rule out that the Index can still stage a minor rebound towards the pull-back resistance of the “Ascending Wedge” breakout at 9930 which is also the key rejection zone where recent rally in price action has stalled the fourth time (as per highlighted by the pink ovals in the daily chart).

The medium-term support remains at 9480/395 zone which is defined by the 50% Fibonacci retracement of 11 February 2016 low to 17 March 2016 high of 10068 and the swing lows area of 01 March/11 March 2016.

Elliot Wave count is unclear at the moment as it can be very bearish where the wave X of a double zig zag has ended at the 23 March 2016 high of 10118 and right now the Index is shaping an impulsive five waves impulsive movement to complete wave (a) of the second leg of the zig zag (intermediate degree) which eventually will break the low of 11 February 2016.  In another potential scenario, the Index is still likely to shape a potential decline but in three waves movement (a/, b/, c/) to complete wave (b) which is a potential 50%/61.8% retracement of the recent countertrend rally from 11 February 2016. Thereafter, another countertrend rally should materialize to complete the wave X of a double zig zag.  In both of these scenarios, the Index is still likely to shape a medium-term decline first. Thus we are keeping the options for the wave count open and adjust accordingly when new elements arise at the 9480/395 support zone.

For this coming week, we are maintaining our bearish bias for the Index and expect a potential rebound first towards the 9930 intermediated resistance before another downleg occurs to target the 9480/395 support with a maximum limit set at the 9255/120 zone (61.8% Fibonacci retracement of 11 February 2016 low to 23 March 2016 high of 10118, the minor swing lows area of 17/25 February 2016 and the pull-back support of the former trendline resistance).

On the other hand, a clearance above the 10130 weekly pivotal resistance is likely to invalidate the medium-term bearish scenario for an extension of the countertrend rally to towards the next resistance at 10630.

S&P 500 – Coming close to potential exhaustion/inflection zone at 2081/2100

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Key Levels (1 to 3 weeks)

Resistances: 2081 & 2100

Supports: 2052 & 2005

Medium-term (1 to 3 weeks) Outlook

The U.S. SP 500 Index (proxy for the S&P 500 futures) has continued its relentless ascend after Fed chairwoman, Yellen’s dovish speech on 29 March 2016 to go slow on future policy benchmark interest rate hikes due to a weak global growth situation. The Index has broken above the 2058 weekly (medium-term) pivotal resistance and continued its climb last Friday to hit a close at 2073.

From its low of 1807 seen on 11 February 2016, the Index has rallied by 15% and it is the best performance without any significant pull-back since the previous rally from the low of 15 October 2014 to the high of 05 December 2014.

Despite this upward climb in price action, several technical elements are still flashing signs of upside exhaustion. Firstly, the Index continues to evolve in a bearish “Ascending Wedge” configuration where the magnitude of the recent “higher highs” is getting lesser than the magnitude of the recent “lower lows”. The upper limit of the “Ascending Wedge” now stands at 2081 which also confluences with the descending trendline that has linked the lower lows of the impending “Double Top” since the current all-time high of 2138 printed in May 2015 and a Fibonacci projection.

Thirdly, the recent rally has been accompanied by a declining volume which suggests a lack of participation in current bullish pressure. Fourthly, upside momentum in price action has started to slow down as the daily (medium-term) RSI has continued to flash a bearish divergence signal at its overbought region.

Despite all these negative technical elements, price action is still not breaking down and we need to respect it as it is still the ultimate deciding factor to conclude whether the countertrend rally from 11 February 2016 low has ran its course.

After Yellen’s speech and non-farm payrolls, the market will now focus on Q1 2016 earnings which will be catalyst that drives the further direction of the S&P 500. The unofficial date to kick start the Q1 2016 earnings session will be on 11 April 2016 where Alcoa and JPMorgan Chase will report their numbers. Q1 2016 earnings will be critical as current earnings growth (Y/Y) has declined for three consecutive quarters since Q2 2015 (we are in an earnings recession). Based on the latest data from Factset, analysts have projected another decline in earnings growth of -8.5% for Q1 2016. If actual numbers turn out to be a decline for earnings growth in Q1 2016, it will be the first time the S&P 500 has seen four consecutive quarters of Y/Y decline in earnings since Q4 2008 through Q3 2009 (the aftermath of Great Financial Crisis).    

Technically, the Index now needs to have a clear break below (daily close) the lower limit of the “Ascending Wedge” now at 2052 to reinforce our earlier bearish view that the countertrend rally from 11 February 2016 has ended (in synch with the other major stock indices) to kick start a least a retracement to target the next support at 2005.

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