the week ahead for major stock indices 21 mar to 25 mar 2016 1802692016

Key Takeaways

• Last week, we have started to see a disparity of performance among the major stock indices. The worst performer is the Nikkei 225 where it did not shaped the expected push up towards the risk zone of 17500/700 but instead broke below the trendline support from the start of its countertrend rally on 12 February 2016 low. In addition, the Hang Seng and DAX have continued their respective push up but remained below the respective risk levels at 21000 and 10100/280.
• The China A50 has met our expected upside target at 9840 where it now faces the risk of mean reversion decline below the 10040/120 resistance.
• The U.S. S&P 500 has closed above the upper limit of the risk zone at 2040 reinforced by a more dovish Federal Reserve (Fed) where it has reduced the median updated interest rate hike projections to only two for this year in the latest 16 March 2016 meeting versus an earlier expectation of four hikes set in the December 2015 meeting. Despite the recent movement seen in the S&P 500, technical elements of other major stock indices are not convincing enough for the S&P 500 to shape a potential strong up move at this juncture. Therefore, we tolerate the excess to the 2052/58 resistance.
• At this juncture, global equities still face a risk of a medium-term decline as the countertrend rally from 11/12 February 2016 lows is closed to its exhaustion point.

Nikkei 225 – Countertrend rally cycle is likely to have ended below 17315

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Key Levels (1 to 3 weeks)

Intermediate resistance: 16870/940

Pivot (key resistance): 17315

Support: 16500/310 & 15750

Next resistance: 17900 & 18615/19100

Medium-term (1 to 3 weeks) Outlook

Last week, the Japan 225 (proxy for the Nikkei 225 futures) has performed worse than our expectation as it did not shape the “desired” last push up towards the 17500/700 “risk zone” where we are expecting for it to start the potential medium-term decline to retrace the countertrend rally cycle that started from 12 February 2016 low. Please click on this link for a recap on our previous weekly technical outlook/strategy.

Instead it just printed a high of 17315 on 15 March 2016 before it shaped a decline a 4.3% to hit a low of 16567 on 17 March 2016. Last week’s price action has likely confirmed the potential end of the countertrend rally cycle that started from 12 February 2016 low of 14780.

Firstly, it has staged a bearish breakout from the lower boundary of the former bullish ascending channel that has linked up the “higher lows” since 12 February 2016 low now turns pull-back resistance at 16870/940 (The Japan Index is the first among the major stock indices to break below the trendline support from 11/12 February 2016 low).

Secondly, the weekly (long-term) RSI oscillator is still below its trendline resistance and the 50% level. In addition, the daily (medium-term) RSI oscillator has flashed a bearish divergence signal. These observations suggests that upside momentum of price action has started to wane which reinforces the risk of a further decline.

Thirdly, based on the Elliot Wave Principal, the Index has likely completed the wave 5 upleg of the bullish c/ wave (second phase of the countertrend rally) that started from 24 February 2016 low of 15540.  Thus, the Index should have completed a corrective countertrend rally cycle that consists of wave a/, b/ and c/ of (a) of an intermediate degree (multi-weeks) and right now it is shaping a potential (decline) in at least a 3 waves motion (a/, b/, c/) of a potential wave (b) to retrace the countertrend rally cycle from 12 February 2016 low. The potential retracement target stands at 15750 which is defined by the 61.8% Fibonacci retracement of 12 February 2016 low to 15 March 2016 high of 17315, the swing lows area of 17 February, 24 February and 01 March 2016 and the close to the pull-back support of the former descending channel bullish breakout.

Fourthly, based on intermarket analysis, the USD/JPY is now in a vulnerable state of the bearish breakdown as price action is testing the lower boundary of a one month plus “triangle range” configuration at 110.98.  In addition, the daily RSI oscillator has broken below its trendline support which is in parallel with the lower boundary of the range configuration. Thus, the daily RSI has flashed a potential “bearish pre-signal” via momentum of price action.

Therefore, the Index is likely to see a further decline to test the first support at the 16500/310 zone where it may shape a “relief rebound” towards the intermediate resistance zone at 16870/940 with a maximum limit set at the medium-term pivotal resistance of 17315 before a further potential tumble towards the next support at 15750.

On the other hand, a break above the 17315 medium-term pivotal resistance is likely to invalidate the expected medium-term bearish scenario to see an extension of the countertrend rally towards the next resistance at 17900 and even 18615/19100 (the major trendline resistance that has linked the “lower highs” since the August 2015 high of 20931).

Hang Seng Index – Risk of decline below 21000 “excess level”

(Click to enlarge charts)

Key Levels (1 to 3 weeks)

Pivot (key resistance): 21000

Supports: 20290 & 19800/500

Next resistance: 22300

Medium-term (1 to 3 weeks) Outlook

Despite last week’s push up above the 20380/520 “risk zone” (printed a high of 20847 on 18 March 2016), the Hong Kong 50 Index (proxy for the Hang Seng Index futures) is still below the “excess” level of 21000 (the medium-term pivotal resistance).

Technical elements are not advocating for a further potential upside movement at this juncture. Firstly, the Index is now testing the pull-back resistance (coincides with the 21000 “excess level”) of the former long-term ascending channel’s support from 02 October 2011 swing low area that has been broken down in 03 January 2016 influenced mostly by the sudden devaluation of the Chinese CNY.

Secondly, both the weekly and daily RSI oscillators are still below their respective resistance levels which suggest that the recent upside momentum seen in price action faces the risk of a reversal at this juncture.

Thirdly, the 21000 “excess level” also corresponds closely with the trendline resistance that is linking the “lower highs” since 23 October 2015, the potential exit target of the bullish “Inverse Head & Shoulders” breakout and the upper boundary of the ascending channel in place since 11 February 2016 low.

Therefore, we are maintaining the bearish bias that the countertrend rally cycle from the 11 February 2016 low of 18056 is coming to a potential end as long as the 21000 medium-term pivotal resistance is not surpassed. A break below the first support at 20290 (the lower boundary of the ascending channel in place since 11 February 2016 low) is likely to add impetus to open up scope for a further potential decline towards the next support at 19800/500 (the swing low areas of 03 March, 09 March & 11 March 2016 and the neckline support of the bullish “Inverse Head & Shoulders” bullish breakout).

However, a clearance above the 21000 medium-term pivotal resistance may 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 – Upside target met at 9840,“mean reversion” decline looms

(Click to enlarge charts)

Key Levels (1 to 3 weeks)

Intermediate resistance: 9840

Pivot (key resistance): 10040/120

Supports: 9490 & 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 rallied as expected and hit our first upside target at 9620 (printed a high of 9694 on 18 March 2016).

This Monday morning, 21 March 2016, the Index has staged another 2.30% rally towards our expected medium-term upside target of 9840 as per highlighted earlier. Please click on this link for a recap on our previous weekly technical outlook/strategy. This upside movement is reinforced by the a latest change in policy on stock trading margin lending facility where China Securities Finance Corp, a state-backed agency which provides funding to brokerages for margin trading will cut interests on margin debt to as low as 3% as reported by the media (link over here).

This morning’s price surge has led the Index into a “mean reversion” zone where it faces the risk of a “snap-back” in price action and other medium-term technical elements are getting “toppish”.

Firstly, price action of the Index is now back at the 9840 neckline resistance of the “Double Top” bearish breakout that occurred in the early 2016 (07 January 2016) which coincides with the global negative feedback loop seen in equities triggered by the sudden devaluation of the Chinese CNY on 04 January 2016. The 9840 neckline resistance also corresponds closely with a Fibonacci cluster.

Secondly, the daily (medium-term) RSI oscillator is coming close to its resistance and overbought region. In addition, the short-term (4 hour) Stochastic oscillator is now flashing a bearish divergence signal at its extreme overbought level. These observations suggest the risks that the current upside momentum of price action is “overstretched”.

The first support to watch now will be at 9490 which is the ascending trendline that linked up the “higher lows” from the 29 February 2016 low of 8757.

As long as the 10040/120 medium-term pivotal resistance (the minor 08 March 2016 swing high + 1.00 Fibonacci projection of the current rally from 29 February 2016 low) is not surpassed, the Index may see a “snap-back” decline to test the first support at 9490. A break below it is likely to trigger a steeper slide towards the next support at 9180/9080 (the swing low area of 11/15 March 2016.

On the flipside, a clearance above the 10040/120 medium-term pivotal resistance may invalidate the “snap-back” decline scenario for a further potential rally towards the next resistance at 10310 before the significant range top of 11100.

DAX – Start of a potential decline below 10130 resistance

(Click to enlarge charts)

Key Levels (1 to 3 weeks)

Pivot (key resistance): 10130

Supports: 9750 & 9480/395

Next resistance: 10960

Medium-term (1 to 3 weeks) Outlook

Last week, the German 30 Index (proxy for the DAX futures) has continued to stage the expected push up just shy below the 10100/280 risk zone (printed a high of 10068) and tumbled by 3.2% to hit a low of 9747 post FOMC meeting on 17 March 2016. Please click on this link for a recap on our previous weekly technical outlook/strategy.

Last week’s price action and current technical elements have suggested that countertrend rally from 11 February 2016 low is likely to have seen a potential medium-term top close to 10130. Firstly, the Index has traced out a bearish “Ascending Wedge” configuration which implies an exhaustion of the recent upmove as the gradient of the slope of the “higher highs” is getting lesser in comparison with the slope of the “higher lows”.

Secondly, the 10130 level also coincides with a confluence of elements (the upper limit of the “Ascending Wedge”, a Fibonacci cluster, the minor swing high of 08/13 January 2016). Thirdly, price action has failed the second time to break above a key “rejection area” of 9930 which is the swing high area of 27 January 2016 and the pull-back resistance of the former long-term trendline support from 11 September 2011 low.

Thirdly, the daily (medium-term) RSI oscillator has retreated from a resistance that is just below the “standard” overbought level of 70%. This observation suggests that upside momentum of price action has started to wane.

Based on the Elliot Wave Principal, the Index has likely completed the wave 5 upleg of the bullish c/ wave (second phase of the countertrend rally) that started from 24 February 2016 low of 9123.  Thus, the Index should have completed a corrective countertrend rally cycle that consists of wave a/, b/ and c/ of (a) of an intermediate degree (multi-weeks) and right now it is shaping a potential (decline) in at least a 3 waves motion (a/, b/, c/) of a potential wave (b) to retrace the countertrend rally cycle from 11 February 2016 low of 8696.  The potential retracement target stands at 9480/395 which is defined by the 50% Fibonacci retracement of 11 February 2016 low to 17 March 2016 high of 10068, the swing lows area of 01 March/11 March 2016 and the close to the pull-back support of the former trendline resistance (in dotted pink as per highlighted in the 4 hour chart).

Therefore, as long as the 10130 medium-term pivotal resistance is not surpassed, the Index is likely to shape a further potential decline and a break below the first support at 9750 (the lower limit of the “Ascending Wedge”) may open up scope for a steep slide to target the 9480/395 support.

However, a clearance above the 10130 medium-term pivotal resistance is likely to invalidate the bearish scenario 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 – Tolerate excess to 2052/58 and watch the first support at 2020 

(Click to enlarge charts)

Key Levels (1 to 3 weeks)

Pivot (key resistance): 2052/58 (excess)

Supports: 2020 & 1968

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 managed to “pop” above the upper limit of the risk zone at 2040 (printed a high of 2052 on last Friday, 18 March 2016).

Even though last Friday’s price action had a daily close above the 2040 medium-term pivotal resistance, current technical elements are not advocating for a potential strong upmove at this juncture.

Firstly, the Index is still evolving within a bearish “Ascending Wedge” configuration with its upper limit now at 2058.  Secondly, the 2058 level also confluences with a Fibonacci projection cluster. Thirdly, the daily (medium-term) RSI oscillator has reached its extreme overbought level and the shorter-term (4 hour) Stochastic oscillator has flashed a bearish divergence signal. These observations suggest that upside momentum in price action is “overstretched” at this juncture and the Index faces the risk of a downside reversal.

The first support now rests at 2020 which is the lower limit of the “Ascending Wedge”. Therefore, we tolerate the excess to 2052/58 (pivotal resistance) but the Index needs to break below 2020 to open up scope for a potential deeper decline to target the next support at 1968 (the swing low of 11 March 2016 that has been tested twice).

On the other hand, a clear break above the 2058 medium-term pivotal resistance (excess) is likely to invalidate our bearish expectations to see a further squeeze up 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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