SPX ELLIOTT COUNT POINTS TO WAVE-B OR WAVE-II -- PROJECTING THE TARGET FOR AN ABC ZIGZAG -- NIKKEI CONTINUES TO FOLLOW THE 10-YEAR TREASURY YIELD -- NIKKEI SURGES ABOVE LATE DECEMBER HIGH -- NARROWING THE FOCUS WITH OUR SEARCH ENGINE
SPX ELLIOTT COUNT SUGGEST CURRENT ADVANCE IS CORRECTIVE... Link for todays video. It is time once again to open Pandoras box with some Elliott Wave analysis. First, note that there are only three rules for Elliott Wave Theory.
Rule 1: Wave-2 cannot retrace more than 100% of Wave-1.
Rule 2: Wave-3 can never be the shortest of the three impulse waves.
Rule 3: Wave-4 can never overlap Wave-1.
Everything else is just a guideline open to interpretation. Chart 1 shows the S&P 500 as a 5-day EMA to smooth out fluctuations. Looking at the entire bull run since March 2009, it appears that the S&P 500 is currently in Wave-II of a bigger five wave decline or Wave-A of a bigger ABC correction. Both scenarios are bearish. First, lets step back and look at the first five-wave sequence. Wave-I extends from the March 2009 low to the June 2009 high and Wave-II extends to the July 2009 low. Waves III and V form clear five wave sequences, which means they are impulsive or part of the bigger uptrend. Things changed when the index forged a five-wave sequence during the decline from early May to early October. Five wave sequences can only be part of a bigger decline, which implies this decline was Wave-A of a bigger ABC zigzag correction or Wave-1 of a bigger five-wave decline. Either way, the implications are rather bearish and project a move below the October low in the coming months.
(click to view a live version of this chart)
Chart 1
PROJECTING THE TARGET FOR AN ABC ZIGZAG... Chart 2 shows a daily line plot (gray) with a 5% zigzag overlaid (black). This zigzag filters out price movements less than 5%. Focusing on price action since April, we can clearly see the five-wave decline from the early May high to the early October low. As noted above, the prior five-wave decline is either Wave-A of a bigger ABC decline or Wave-I of a bigger five-wave decline. The advance since early October forms Wave-II or Wave-B and breaks down into a rising abc zigzag. Second waves can be tricky because they often retrace almost all of Wave-I. Wave-II cannot, however, exceed the high of Wave-I. According to Elliott Wave Theory, Wave-A and Wave-C are often equal, which means we can add the length of Wave-A to the low of Wave-B for an upside target. Using this technique, the upside target is around 1345, which is just below the May-July highs. Even though both counts call for a subsequent wave lower, it would be prudent to wait for a confirming signal on the price chart. In other words, the current trend is clearly up and we have yet to see a bearish reversal or significant selling pressure. At the very least, the S&P 500 needs to break the trendline extending up from the early October low, which currently marks support at 1220 (green circle).
(click to view a live version of this chart)
Chart 2
NIKKEI CONTINUES TO FOLLOW THE 10-YEAR TREASURY YIELD... On Friday I wrote about the 10-year Treasury Yield ($TNX) as it formed a higher low and surged Wednesday-Thursday-Friday. Treasury yields are rising again today and the 10-year Treasury Yield is trading above its early January high. Such a move could be bullish for the Nikkei 225 ($NIKK). Say what? No, that is not a typo. In his classic book, Intermarket Analysis, John Murphy pointed out the positive relationship between the Nikkei and the 10-year Treasury Yield. A decline in treasury yields signals deflation or slowing economic growth, which is negative for Japan. In contrast, a rise in treasury yields signals inflationary pressures or strong economic growth, which is positive for Japan. Chart 3 shows the Nikkei 225 (black) and the 10-year Treasury Yield (red) over the past 16 months. Even though the Fukushima nuclear disaster knocked the Nikkei out of whack for a few months, the positive relationship with the 10-year Treasury Yield remained in place. The indicator window shows the Correlation Coefficient to quantify this relationship. There were a few dips into negative territory, but these two have been positively correlated most of the last 16 months.
(click to view a live version of this chart)
Chart 3
NIKKEI SURGES ABOVE LATE DECEMBER HIGH... Chart 4 shows the Nikkei 225 surging over 3% last week and breaking its late December high with a move above 8750. Asian markets could be slow this week because of the Chinese New Year. Markets in China, Hong Kong and Singapore are closed this week for year of the dragon. Turning back to three year price chart, the Nikkei surged from March 2009 to March 2010 and then corrected with a big falling wedge. This wedge retraced just over 61.80% of the prior decline. The wedge trendline and October high combine to mark resistance in the 9250 area. A break above these two would be bullish for the index, provided it is confirmed by a breakout in the 10-year Treasury Yield.
(click to view a live version of this chart)
Chart 4
NARROWING THE FOCUS WITH OUR SITE SEARCH... Searching the website at StockCharts.com just got easier with categories to narrow your focus. Users can now search the ChartSchool (CS), Blogs (BL), Support (SU), Market Message (MM), Symbols (SM), Store (ST), S.C.A.N. (SC) or Public ChartLists (PC). It all starts with a general search. In the example below, I searched for the term energy. A list of results appears with icons denoting the appropriate category. There is a list of categories just above the search box. Users can click on a category to narrow their search. Clicking on blogs will show only search results related to the blogs. Clicking on S.C.A.N. will narrow results to those found through the StockCharts Answer Network (S.C.A.N). Click the image below to start your search.
