the week ahead for major stock indices 18 jan to 22 jan 2016 1793562016

 Nikkei 225 – Breaking key long-term support with further downside potential after “snap-back”

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Key Levels (1 to 3 weeks)

Intermediate resistance: 17740/840

Pivot (key resistance): 18530

Support: 16500 & 16000

Next resistance: 19630  

Medium-term (1 to 3 weeks) Outlook

The Japan 225 (proxy for the Nikkei 225) has already breached the 16900 long-term key support in last Friday (15 January 2016), U.S. session. Our preferred recovery view has been invalidated; please click on this link for a recap on our previous weekly outlook/strategy.

Last week price action has broken below the lows of the “Black Monday”, 24 August 2015 and 29 September 2015 and the weekly (long-term) RSI oscillator that measures the momentum of price action has not reached its oversold region and it remains bearish below its resistances.

Based on the Elliot Wave Principle, it is likely that the Index has completed its primary bull cycle from the low of 7021 printed on 08 March 2009 to a high of 20962 printed on 21 June 2015, a remarkable 200% increase in this bullish cycle. Right now, it is likely that we are seeing the start of a primary bear cycle that may last around 6 months to 1 year at the minimum to retrace/correct the 6+ years of bullish cycle.

On the medium-term (1 to 3 weeks), the key support to pay attention will be at 16000 which is an area of confluence (former graphical resistance that has linked the swing high areas of 19 May 2013 to 21 September 2014, 38.2% Fibonacci retracement of the up move from 20 November 2011 low to 21 June 2015 high of 20962 & 1.00 Fibonacci projection of the down move from 21 June 2015 high to 27 September 2015 low projected from 22 November 2015 high). On the flipside, the key resistance will be at 18530 which is defined by the pull-back resistance (in dotted red) of the former trendline support from 14 October 2012 low (see weekly chart) and the congestion area of 13 September 2015 to 13 December 2015.

The daily RSI oscillator has dipped into the oversold region and flashed a bullish divergence signal. It also has room for further potential upside before reaching its resistance/50% neutrality level. In addition, the 4 hour (short-term) Stochastic oscillator has exited from its oversold region. These observations suggest that the momentum of last week’s decline has “overstretched” and it is likely to see a “mean reversion”/short-term rally within its medium-term downtrend.

Above the 16500 level, the Index may see a “snap-back” to test the 17740/840 intermediate resistance (congestion area + 38.2% Fibonacci retracement of the down move from 30 December 2015 high to 16 January 2016 low, U.S. session) with a maximum limit set at the 18530 pivotal resistance before another down leg occurs to target the 16000 support.

However, a clearance above the 18530 key pivotal resistance is likely to invalidate the bearish view for a further squeeze up towards the next resistance at 19630 (trendline linking the lower highs since 11 August 2015).

Hang Seng Index – Broke 19800/700 long-term key support

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Key Levels (1 to 3 weeks)

Intermediate resistance: 20380

Pivot (key resistance): 21000

Support: 19045 & 18200

Next resistance: 22300

Medium-term (1 to 3 weeks) Outlook

The Hong Kong 40 Index (proxy for the Hang Seng Index) has broken clearly below the 19800/700 key long-term support as defined by the lower boundary of the former ascending range in place since 07 November 2010 high (see weekly chart). On the longer-term, it implies more weakness ahead for the Index to test the 16110/15000 which is defined by the October 2011 swing low and a Fibonacci cluster.

On the medium-term (1 to 3 weeks), the key support to watch will be at 18200 which is defined by the swing low area of 03 June 2012 and the 1.618 Fibonacci projection of the recent down move from 23 October 2015 high to 14 December 2015 low projected from 24 December 2015 high.

The medium-term term trend remains bearish with its intermediate resistance at 20380 pull-back of the former ascending range and the former range support of 24 August 2015 to 29 September 2015 follow by the significant resistance of 21000, the upper boundary of the bearish descending channel in place since 26 May 2015 high.

The 4 hour (short-term) Stochastic oscillator has just exited from its oversold region which highlights the risk of a short-term rebound in price action after two week’s steep decline. Thus, above the 19045 level, the Index may see a “snap-back” towards the 20380 intermediate resistance with a maximum limit set at the 21000 pivotal resistance for another down leg to target the next support at 19045.

On the other hand, a clearance above the 21000 pivotal resistance is likely to negate the bearish tone for a squeeze up towards the next resistance at 22300.

FTSE China A50 – Further downside pressure below 9760/9950

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Key Levels (1 to 3 weeks)

Intermediate resistance: 9760

Pivot (key resistance): 9950

Support: 8980/8770

Next resistance:  11090

Medium-term (1 to 3 weeks) Outlook

There are still no clear technical elements that indicate a “bottoming” process for the China A50 Index (proxy for the FTSE China A50) as it had shed 18% from its 23 December 2015 high of 11093.

On the medium-term (1 to 3 weeks), the Index is still evolving within a bearish descending channel in place since 23 December 2015 high with its upper boundary (resistance) at 9950.  The 9950 level is a significant medium-term resistance as it also confluences with the neckline resistance of the bearish “Double Top” breakout (see 4 hour chart).

The key support rests at 8980/8770 which is defined by the bearish “Double Top” breakout exit potential and a Fibonacci cluster. Given that the 4 hour Stochastic oscillator that has exited from its oversold region and still has room for further upside before reaching its extreme overbought level, the Index may first shape a rebound towards the intermediate resistance at 9760  before another potential down leg materializes to target the 8980/8770 support.

However, a break above the 9950 pivotal resistance is likely to invalidate the bearish scenario for a push up to retest the range top of 09 November to 23 December 2015 at 11090.

DAX – Broke the long-term key support at 9800/750

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Key Levels (1 to 3 weeks)

Resistances: 10165 & 10880/11000

Supports: 9300 & 9045

Medium-term (1 to 3 weeks) Outlook

The German 30 Index (proxy for the DAX) has broken below the 9800/750 long-term key support and even the excess at 9570. The primary bull cycle of 6 years from 08 March 2008 low of 3588 to the high of 12408 printed on 12 April 2015 is likely to have ended.

On the medium-term (1 to 3 weeks), the Index is coming close to the 9300 range support area of the “Black Monday”, 24 August 2015 and 29 September 2015. In addition, the daily RSI oscillator has flashed a bullish divergence signal at its oversold region which suggests that the downside momentum of the decline seen in the last two weeks appears to be overstretched (the maximum push up in price action is only 5.6% versus a decline of around 14% from 30 December 2015 high).

Thus, the Index may see a mean reversion/”snap-back” in price action with the key medium-term resistance at 10165 (the upper boundary of a bearish descending channel and 13 January 2015 high that was rejected right at its former swing low area of 14 December 2015).

Therefore from a medium-term perspective, we have decided to be prudent and wait for a clearer picture before taking a directional bias. Turn neutral between 9300 and 10165 for now. 

S&P 500 –  Broke below 1890/80 long-term key support

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Key Levels (1 to 3 weeks)

Supports: 1835/20 & 1780

Resistances: 1935/54 & 1994

Medium-term (1 to 3 weeks) Outlook

The U.S. SP 500 Index (proxy for the S&P 500)  has staged a rebound on last Thursday, 14 January 2015 above the 1890/80 support but failed to create that significant short squeeze towards the expected upside target of 1970 (printed a high of 1935).

Thereafter, it has broken below the long-term key support at 1890/80 on last Friday, 15 January 2015. This is a significant development as the 1890/80 support is a Fibonacci cluster and the lower boundary of the long-term bullish ascending channel in place since the start of the primary bull cycle in March 2009.

Based on the Elliot Wave Principal and long-term momentum/breadth indicators, it is highly likely that the Index has completed its primary bull cycle which peaked on 2138 in May 2015 and shaped a “failure” fifth wave rally from the “Black Monday”, 24 August 2015 low.

Thus, we are now seeing the start of a primary bear cycle that may last around 6 months to 1 year at the minimum to retrace/correct the 6+ years of bullish cycle.  The Index has now traced out an impending bearish “Double Top” pattern with its neckline support at 1835/20 (see weekly chart)

However on a medium-term perspective (1 to 3 weeks), technical elements are mixed (see daily & 4 hour charts), thus we prefer to stay neutral for now between 1935/54 and 1835/20. We will monitor how the price reacts at these two levels before deciding on a directional view.

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