the week ahead for major stock indices 14 mar to 18 mar 2016 1801492016

Key Takeaways

• Last week, all the major stock indices have rallied as expected and reinforced by the  European Central Bank (ECB)’s latest monetary easing policies.
• However, last week’s upside movement has lead all the major stock indices into a significant medium-term parallel risk zones where the second phase of the countertrend trend rally in place since 11/12 February 2016 low now faces the risk of an end.
• The risk zones (resistances) are as follow; Nikkei 225 (17500/900), Hang Seng (20520/21000), China A50 (9620/9840), DAX (10180/390) and S&P 500 (2030/40).
• This week will be highly volatile as we have three major central banks meetings on their respective monetary policies; Bank of Japan (BOJ) on 15 Mar, U.S. Fed on 16 Mar and Bank of England (BOE) on 17 Mar. In addition, we will have U.S. options expiration (“Triple Witching”) on Friday, 18 Mar where we see simultaneous expiration of various futures and options contracts on equities and indices.  

 Nikkei 225 – Push up towards risk zone of 17500/900 before a potential decline occurs

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Key Levels (1 to 3 weeks)

Intermediate resistance: 17500/700

Pivot (key resistance): 17900

Support: 16500/310

Next resistance: 18615/19100

Medium-term (1 to 3 weeks) Outlook

Last week, the Japan 225 (proxy for the Nikkei 225 futures) has moved within our expectation as the Index has shaped the initial pull-back towards the medium-term pivotal support zone at 16500/310 (printed a low of 16458 on 11 March 2016) before it resumed its upside movement to break above 17100, the former minor swing high area of 04 March 2016 on last Friday, 11 March 2016 in the U.S. session. Please click on this link for a recap on our previous weekly technical outlook/strategy.

As mentioned earlier, the Index is likely in the midst of undergoing its potential final stage of the second phase countertrend rally that started from the 24 February 2016 low of 15540. The intermediate resistance stands at the 17500/700 follow by the 17900 significant resistance. The 17900 level is defined by a confluence zone that consists of the significant swing high area of 31 January 2016 before the Index staged a horrendous decline of 17% within two weeks to hit the 12 February 2016 low of 14780, the 50% Fibonacci retracement of broad decline from 21 June 2015 high of 20962 to 12 February 2016 low of 14780 and now the upper boundary of the medium-term ascending channel in place since the start of this on-going countertrend rally cycle from 12 February 2016 low.

The Nikkei 225 and the USD/JPY has a direct correlation in terms of price movement. Since the start of the countertrend rally of the Index from 12 February 2016 low of 14782, the USD/JPY has not shaped any “higher highs” and capped below its range top at 114.30/45. Current price action of USD/JPY is coming close to this range resistance and from intermarket analysis perspective; this observation reinforces the potential medium-term toppish scenario for the Index.

Based on the Elliot Wave Principal, the Index is likely now in the tail end of the wave 5 upleg to complete the bullish c/ wave (second phase of the countertrend rally) that started from 24 February 2016 low of 15540. Thereafter, the Index should have completed a corrective rally cycle that consists of wave a/, b/ and c/ of (a) of an intermediate degree (multi-weeks). The risk zone now stands at 17500/900 which is the potential end target of the wave c/ of (a) and a possible steep decline may occur at that juncture to see the start of the potential bearish wave (b) cycle that is likely to transform into a set of potential three waves structure in the first step.

In addition, the daily (medium-term) RSI oscillator, a price momentum indicator still has room for further upside before reaching its extreme overbought level. This observation reinforces the potential final push up scenario to complete the abovementioned wave 5 of c/.

The Index is now likely to continue its last Friday’s rally towards the 17500/700 zone with a maximum limit set at 17900 medium-term pivotal resistance to end the countertrend rally cycle from 12 February low of 14782 before a potential bearish corrective movement occurs to target the 16500/310 support.

On the other hand, a clearance above the 17900 pivotal resistance may invalidate the bearish scenario for a continuation of the countertrend rally towards the next resistance at 18615/19100.

Hang Seng Index –Drfited up to 20380/520 risk  zone where a potential decline looms

(Click to enlarge charts)

Key Levels (1 to 3 weeks)

Intermediate resistance: 20380/520

Pivot (key resistance): 21000

Supports: 19800 & 19500

Next resistance: 22300

Medium-term (1 to 3 weeks) Outlook

Last week we adopted a neutral stance on the Hong Kong 50 Index (proxy for the Hang Seng Index futures) for our medium-term outlook/strategy as the Index is approaching a critical risk zone (resistance) at 20380/520.

Last Friday, the Index has drifted up into the 20380/520 which is defined by the former swing lows area of 24 August 2015 and 29 September 2015, close to the 61.8% Fibonacci retracement of the steep decline from 24 December 2015 high of 22306 to 11 February 2016 low of 18056 and the 1.00 Fibonacci projection of the rally from 11 February 2016 low to 22 February 2016 high of 19581 projected from 24 February 2016 low of 18825. In addition, it also coincides with upper boundary of the bearish descending channel in place since 26 May 2015 high and the pull-back resistance of the former long-term trendline support from 02 October 2011 swing low area.

The daily (medium-term) RSI oscillator has also reached a resistance where upside movement of the Index has been capped in the past two occasions (as highlighted by the shaded pink ovals). This observation suggests that the upside momentum of the Index is being overstretched and it faces the risk of a pull-back in price action at this juncture.

Right above the 20380/520 zone is another resistance at 21000 which is defined by a confluence of elements. It is the former swing low area of 14 December 2015, a trendline resistance from 26 October 2015 high, the upper boundary of the ascending channel in place since the start of the countertrend rally cycle from 11 February 2016 low and the potential exit target of the bullish “Inverse Head & Shoulders” bullish breakout.  Therefore, the 21000 level is considered as an “excess”.

In conclusion, the Index is now at the risk zone of 20380/520 and as long as the 21000 medium-term pivotal resistance (excess) is not surpassed, it is likely to shape a pull-back to retrace the countertrend rally to target 19800 before the 19500 support (pull-back area of the Inverse Head & Shoulders” bullish breakout).

However, a clearance above the 21000 pivotal resistance may see an extension of the current rally towards the next resistance at 22300 in the first step.

FTSE China A50 – 9620/840 remains the key resistance to watch

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Key Levels (1 to 3 weeks)

Intermediate support: 9200

Pivot (key support): 8960

Resistances: 9620 & 9840

Next support: 8560

Medium-term (1 to 3 weeks) Outlook

Last week, the China A50 Index (proxy for the FTSE China A50 futures) has shaped the expected pull-back towards the predefined intermediate support at 9200 (printed a low of 9077 on 11 March 2016) which is just above the 8960 pivotal support before it staged an upside reversal towards the first expected target at 9620. Click here for a recap on our previous weekly technical outlook/strategy.

No change in technical elements since the bullish breakout of the former descending channel from 23 December 2015 high. Intermediate support remains at 9200 (now also the short-term pull-back support of the former descending trendline from 05 March 2016 high) with 8960 as the pivotal support for a potential further push up towards 9620 follow by 98740 next (the neckline resistance of the “Double Top” bearish  breakout and a Fibonacci cluster).

However, a break below the 8960 medium-term pivotal support is likely to invalidate the bullish expectation to see a decline to retest the 29 February 2016 swing low at 8560.

DAX – A potential decline looms at the 10100/280 risk zone

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Key Levels (1 to 3 weeks)

Intermediate resistance: 10100/280

Pivot (key resistance): 10390

Support: 9570/480

Next resistance: 10960

Medium-term (1 to 3 weeks) Outlook

The German 30 Index (proxy for the DAX futures) has staged the expected push up towards the risk zone at 10100/280 (printed a high of 9997 on 10 March 2015 on the onset of the European Central Bank (ECB)’s latest easing monetary policies).

As mentioned in our last weekly outlook/strategy, the Index is now coming close to the tail end of the second phase of the countertrend rally in place since the 24 February 2016 low of 9123. Based on the Elliot Wave Principal, the Index is likely now in the midst of undergoing the final wave 5 to complete the bullish c/ wave (second phase of the countertrend rally) that started from 24 February 2016 low of 9123. Thereafter, the Index should have completed a corrective rally cycle that consists of wave a/, b/ and c/ of (a) of an intermediate degree (multi-weeks) The risk zone now stands at 10100/280 which is the potential end target of the wave c/ of (a) and a possible steep decline may occur at that juncture to see the start of the potential bearish wave (b) cycle that is likely to unfold into a set of three waves.

Above the 10100/280 risk zone will be an “excess” level of 10390 which is defined by the upper boundary of the ascending channel in place since the start of the countertrend rally cycle from 11February 2016 low, the 618% Fibonacci retracement of the steep decline from 30 November 2015 high to the 11 February 2016 low and the 1.382 Fibonacci projection of the first phase countertrend rally from 11 February 2016 low to 22 February 2016 high projected from 24 February 2016 low of 9123.

The Index may see a slight push up towards the 10100/280 risk zone with a maximum limit set at this week medium-term pivotal resistance of 10390 before the expected corrective downside movement materializes to target the 9570/480 support.

On the flipside, a clearance above the 10390 pivotal resistance is likely to see an extension of the countertrend rally towards the next resistance at 10960 (the significant upper boundary of the descending channel in place since its current all-time of 12408 printed in April 2015).

 S&P 500 – Coming close to 2030/40 risk zone for a potential decline

Source: timingcharts.com

(Click to enlarge charts)

Key Levels (1 to 3 weeks)

Intermediate resistance: 2030

Pivot (key resistance): 2040

Supports: 1970 & 1922

Next resistance: 2081

Medium-term (1 to 3 weeks) Outlook

Last week, the U.S. SP 500 Index (proxy for the S&P 500 futures) has rallied as expected and hit the lower limit of the 2020/30 risk zone (printed a high of 2023 on last Friday, 04 March 2016 U.S. session).

To recap the 2020/30 risk zone is defined as the upper limit of the bearish “Ascending Wedge” (in dotted purple) in place since 26 February 2016 high of 1971 and the trendline resistance in place since 02 December 2015 swing high area. In conjunction with the Elliot Wave Principal, a bearish “Ascending Wedge” usually forms at the end of a bullish impulsive 5^th wave or the tail end of a corrective wave c which represents an exhaustion of the prior bullish sentiment. Therefore, these observations reinforce the expectation that we are coming to an end of the second phase of the countertrend rally that started from the 24 February 2016 low of 1890.

Narrowing down to the fractals of the waves, the Index is now likely to be the final 5^th wave of wave e to complete the structure of the “Ascending Wedge” which also conclude the wave c/ of (a), a corrective rally cycle that consists of wave a/, b/ and c/ of an intermediate degree (multi-weeks) and a possible steep decline may occur at that juncture to see the start of the potential bearish wave (b) cycle that is likely to unfold into a set of three waves. The final 5^th wave of wave e has a potential “excess” target of 2040 defined by a Fibonacci cluster.

In addition, the daily RSI oscillator has almost reached its overbought region which suggests limited upside potential in price action at this juncture.

In terms of positioning as reported by the U.S. Commodity Futures Trading Commission (CFTC) on the S&P E-mini futures, the “small speculators” has increased net long positions by 20% from the 16 February 2016 reported date. This observation represents over optimism on the bullish camp of the “small speculators” and on the contrary, the risk of a retracement/decline increases at this juncture of the current rally (refer to the last chart).

Therefore as long as the 2040 medium-term pivotal resistance (excess) is not surpassed, the Index is likely to shape the potential corrective bearish movement to retest the 1970 support in the first step before targeting the next support at 1922.

On the other hand, a clearance above the 2040 pivotal resistance may invalidate the bearish expectation for the setback to see an extension of the countertrend rally towards the next resistance at 2081 (the descending trendline that has linked the lower lows of the “Double Top” since the current all-time high of 2138 printed in May 2015).

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