the week ahead for major stock indices 25 jan to 29 jan 2016 1794542016

Nikkei 225 – Potential “snap-back” rally in progress

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Key Levels (1 to 3 weeks)

Intermediate support: 16790

Pivot (key support): 16480

Resistances: 17740/840 & 18340/530

Next support: 16000/15800 

Medium-term (1 to 3 weeks) Outlook

Last week, the Japan 225 (proxy for the Nikkei 225) has shaped the expected rebound towards a high of 17292 (below our expectations of 17740/840) before it dropped towards the medium-term downside target of 16000. Click here for a recap of our previous weekly outlook/strategy.

Going forward, the technical elements are now advocating for a potential mean reversion/ “snap-back” rally scenario after a steep decline of 20% from 19905 high seen on 18 December 2015 (the last BOJ’s monetary policy meeting) to last week low of 15800.

The rebound off the 16000 support week seen late last week coincides with the USDJPY on 116.00 (recap on the 16000 support: it is an area of confluence that is defined by the 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).

Interestingly, it has formed a weekly bullish “Hammer” candlestick pattern on the 16000 support which represents a change in sentiment from negative from positive. Even though, we still need further price actions and other factors to determine whether we are now seeing the start of a genuine recovery that will surpassed last year high of 20960 but at least in the medium-term, it adds credit to the mean revision/ “snap-back” rally expectation.

RSI momentum indicators from weekly to daily time frames are still showing potential of further rebound as they still has room before reaching their respective resistances as indicated on the charts.

Elliot Wave Principal are not showing any clear wave count at this juncture in the longer-term, it can be either a bearish count where this ongoing push up is considered as a corrective wave (b) before another leg down (c) for a possible break below of the 16000 level. For the bullish count, it can be considered as an impulsive wave (3) for a retest of last year summer high at 20960 and a potential break beyond it. For both of these counts, the Index is still showing a high probability of a push up at least in the medium-term for the preferred mean revision scenario. Therefore, we should be too fixated on the detailed count and take things one step as a time as future price actions develop to offer us better clarify on the wave structure.

From an intermarket perspective, the USD/JPY is used a barometer of “risk-on/off” environment which implies a direct correlation with the Index. Technically, the USD/JPY has started to stabilize at the 116.00 support which suggests that the 2 weeks of “risk-off” in equities has started to stabilize and this observation reinforces the mean reversion scenario for the Index.

On the shorter-term, the Stochastic oscillator (4 hour) has started to exit from its overbought zone which suggests at least a minor pull-back in price action for the Index. The intermediate support to watch for this potential minor pull-back will be at 16790 (former trendline resistance from 30 December 2015 high now turns pull-back support) with a maximum limit set at the 16480 medium-term pivotal support before another upleg occurs to target 17740/840 before the 18340/530 resistance (pull-back resistance of the former trendline support from 14 October 2012 low & close to 61.8% Fibonacc retracement from 22 November 2015 high to last week’s low).

However, a break below the 16480 pivotal support is likely to negate the bullish tone to see a slide to retest the 16000/15800 support.

 Hang Seng Index – 18200 is the support to watch for this week

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Key Levels (1 to 3 weeks)

Intermediate support: 18900/540

Pivot (key support): 18200

Resistances: 20380 & 21000

Next support: 16100

Medium-term (1 to 3 weeks) Outlook

The Hong Kong 40 Index (proxy for the Hang Seng Index) has dropped lower after a temporary push up towards 19727 on 19 January 2015  and almost met the downside target of 18200 (printed a low of 18537).

Interestingly, the on-going bounce seen last Friday just above the 18200 support (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) has started to show strength via the medium-term (daily) RSI oscillator. It still has room for further upside potential before reaching its resistances after a bullish divergence signal (indicates a slowdown in downside momentum of the on-going decline seen from 22 October 2015 high).

The significant medium-term resistance stands at 20380 which is the former range bottom of 24 August 2015 to 29 September 2015 and close to the 50% Fibonacci retracement of the decline from 24 December 2015 high to last week low follow by the upper boundary of the descending channel in place since 25 May 2015 high now at 21000.

Shorter-term Stochastic oscillator (4 hour) is turning down from its extreme overbought level which highlights the risk of a pull-back towards the 18900/540 intermediate support before another potential push up to test the 20380 resistance.

On the other hand, failure to hold above the 18200 medium-term pivotal support is likely to invalidate the preferred rebound scenario for a further plunge towards the next support at 16100.

FTSE China A50 – Neutral between 9075 & 9590

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Key Levels (1 to 3 weeks)

Supports: 9075 & 8770

Resistances: 9590 & 9950   

Medium-term (1 to 3 weeks) Outlook

The China A50 Index (proxy for the FTSE China A50) has not made a new weekly low below the previous minor swing of 9075. This is a positive development as the Index printed a new weekly low every week since 27 December 2015.

On the shorter-term, the Index is still evolving within a bearish descending channel in place since the 23 December 2015 high with its upper boundary (resistance) now at 9590.  The next support to watch rests at 8770 which is defined by the bearish “Double Top” breakout exit potential and a Fibonacci cluster.

Elements are mixed at the moment, thus we prefer to turn neutral between 9075 and 9590 and wait for clearer price actions to surface in order to have a directional view.

DAX – 9550/9300 is the support to hold for potential “snap-back rally”

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Key Levels (1 to 3 weeks)

Intermediate support: 9550

Pivot (key support): 9300

Resistances: 9880/935 & 10165/280

Next support: 9045

Medium-term (1 to 3 weeks) Outlook

The German 30 Index (proxy for the DAX) has managed to stage a rebound from the 9300 range support area of the “Black Monday”, 24 August 2015 and 29 September 2015. In addition, technical elements have started to turn positive on the medium-term.

It has formed a daily bullish “Hammer” candlestick pattern at the 9300  support which indicates a change of sentiment from negative from positive. In addition, the daily (medium-term) RSI oscillator still has continued to inch higher after the bullish divergence signal and it still has room for further upside potential before reaching its trendline resistance. This observation suggests that upside momentum remains intact.

On the shorter-term (4 hour), price action has staged a bullish breakout from a “Descending Wedge” configuration (in dotted purple). This type of chart configuration usually precedes a mean reversion/ “snap-back” rally in price action after a steep decline from 30 December 2015 high.

The shorter-term (4 hour) Stochastic oscillator has started to exit from the overbought region which highlights the risk of a minor pull-back below the intermediate resistance zone of 9880/9935 with a maximum limit set at the 9300 medium-term pivotal support before another potential upleg to target the next resistance at 10165/280 (upper boundary of the descending channel in place & the 38%/50% Fibonacci retracement zone of the steep decline from 01 December 2015 to last week low).

On the flipside, a break below the 9300 pivotal support is likely to invalidate the “snap-back rally” view for a further plunge towards the next support at 9045 in the first step.

S&P 500 –  Potential mean reversion/ “snap-back rally” in progress above 1875/51 support

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Key Levels (1 to 3 weeks)

Intermediate support: 1875

Pivot (key support): 1851

Resistances: 1916 & 1935/54

Next support: 1820/11

Medium-term (1 to 3 weeks) Outlook

The U.S. SP 500 Index (proxy for the S&P 500) has continued its horrendous decline and tested the 1830/20 significant range support area last Wednesday, 21 January 2016  which is defined by the “Black Monday”, 24 August 2015 low, the neckline support of the impending bearish “Double Top” configuration and a Fibonacci cluster Thereafter, it staged a rebound of 5.2% to last Friday high of 1909  which is the most in the past two weeks.

Technical elements have started to turn positive which at least support a medium-term potential mean reversion/ “snap-back” rally scenario after a steep decline seen from 30 December 2015 high.

Price action has formed a bullish weekly “Hammer” candlestick pattern on the 1835/20 significant range support which indicates a change in the sentiment from negative to positive. In addition, the daily RSI oscillator is now showing sign of further upside momentum as it still has room to maneuver to the upside before reaching its resistance.

On the shorter-term (4 hour), the Index has broken out of its “Expanding Wedge” configuration (in dotted purple). This type of chart configuration usually indicates a blow out (capitulation) of downside pressure after a steep decline where a potential “snap-back” rally should occur next. The pull-back support of the “Expanding Wedge” bullish breakout now stands at 1875.

The short-term (4 hour) Stochastic oscillator is now attempting to exit from its overbought level which suggests the risk of a minor pull-back in price action below the intermediate resistance of 1916 after last two days of steep upside movement.

The potential pull-back is likely to be held by the 1875 pull-back support of the “Expanding Wedge” bullish breakout with a maximum limit set at the 1851 medium-term pivotal support before another potential upside movement materializes to target the 1935/54 resistance zone (pull-back resistance of the former ascending channel support from March 2009 low, minor swing high of 13 January 2016 & close to 50% Fibonacci retracement of the steep decline from 30 December 2015 high to last week low.

On the other hand, failure to hold above the 1851 pivotal support may negate the “snap-back rally” view for a slide to retest the critical 1820/11 range support.

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