the week ahead for major stock indices 15 feb to 19 feb 2016 1797172016

 Key Takeaways

• Last week’s expected downside target has been met for all the Indices; S&P 500 (1811), Nikkei 225 (15020), Hang Seng Index (18200) & DAX (close to 8580).
• Cautious for the bears now as “risk on” sentiment is likely to be back with a potential countertrend rally set in place for stock indices. Key supports to watch this week; S&P 500 (1833), DAX (8580), Nikkei 225 (14660), Hang Seng (18200); China A50 (8770/670). 

Nikkei 225 – Potential countertrend rally in progress above 14660

(Click to enlarge charts)

Key Levels (1 to 3 weeks)

Intermediate support: 15420

Pivot (key support): 14660

Resistances: 16500, 16890 & 17900

Next support: 13900

Medium-term (1 to 3 weeks) Outlook

Last week, the Japan 225 (proxy for the Nikkei 225 futures) has traced out the expected downside movement and hit our downside target at 15260/15020 (printed a low of 14782 on 12 February 2016). Please click here for a recap on our previous weekly outlook/strategy.

For the week, the Japan 225 has slumped by 15% which was the biggest weekly drop since October 2008. Going forward, what is in store for the Index in the coming weeks?

A quick recap, last week’s downside target (support) at 15260/15020 is considered as a significant inflection zone as it found by a confluence of multiple elements (a Fibonacci projection cluster, lower boundary of a steep bearish descending channel in place since 18 December 2015 and close to the swing low areas of  03 August 2014 and 12 October 2014).

Interestingly, the daily (medium-term) RSI oscillator has flashed a bullish divergence signal at its oversold region and still has room for further upside potential before reaching its trendline resistance and the overbought region, this observation suggests that last two week of downside momentum has slowed down and the Index is likely to see a potential countertrend rally at this juncture.

Based on the Elliot Wave Principal in conjunction with momentum indicators and Fibonacci analysis, the downtrend that started from its multi-year high of 20962 in 21 June 2015 can be labelled as a set three wave corrections of (a), (b) and (c) that is likely to have ended at last week low of 14782 (close to our inflection zone of 15260/15020). The Index is now likely to shape a countertrend rally in a set of 3 three waves (a), (b) and (c) of X to retrace the current medium-term downside movement from the 20962 high. This kind of retracement is typically set at 50%/61.8% of the whole down move and the 50% Fibonacci retracement stands at 17900 which also corresponds closely with the 01 February 2016 swing high.

Technical elements and intermarket observations (in particular from USD/JPY) are not suggesting that the Index has hit a “rock bottom” and a rally to a new high is on the cards. But from a medium-term perspective (1 to 3 weeks), a countertrend movement cannot be rule out where its magnitude and duration will be higher and longer that the previous mean reversion rally seen from 21 January 2016 low of 15796 to 01 February 2016 high of 17907.

The 4 hour (short-term) Stochastic oscillator has reached its extreme overbought level where the Index is likely to see a pull-back soon below the 16500 intermediate resistance after a steep rally from last Friday, 12 February 2016 low of 14782. The expected pull-back is likely to be held by the intermediate support of 15420 before another leg of potential countertrend rally occurs to target the next resistance at 16890 (the upper boundary of the steep descending channel). A clearance above the 16890 level is likely to open up scope for a further upside movement to target the 17900 resistance.

Only a break below the 14660 medium-term pivotal support is likely to invalidate the expected countertrend rally for a further decline towards the long-term support at 13900.

Hang Seng Index – 18200 met, now potential relief rebound in progress above 18500/18060

(Click to enlarge charts)

Key Levels (1 to 3 weeks)

Intermediate support: 18500

Pivot (key support): 18060

Resistances: 19720 & 20380

Next support: 16950

Medium-term (1 to 3 weeks) Outlook

Last week, the Hong Kong 50 Index (proxy for the Hang Seng Index futures) has gapped down and hit the expected medium-term downside target at 18200 (printed a low of 18056 on 11 February 2016) after a three day Lunar New Year break.

Interestingly, it has formed at weekly “Doji” candlestick pattern at the 18200 support. Even though the “Doji” pattern is not a strong bullish reversal candlestick in terms of a change in sentiment but nevertheless, it indicates that the bears are hesitant to push the Index lower and likely to take a breather at this juncture after a steep decline in place since 24 December 2015.

In addition to support a relief rebound scenario, the daily (medium-term) RSI oscillator has flashed a bullish divergence signal at the oversold region which indicates that downside momentum has abated. It also still has some room left for further upside before reaching its resistance and the 50% level.

Given that the 4 hour (short-term) Stochastic oscillator has inched up to its extreme overbought level, the Index now may soon see a potential dip towards the 18500 intermediate support before another potential upleg occurs to target the 19720 resistance (minor swing high area of 19 January and 29 January 2016) with a maximum limit set at the 20380 resistance (former swing low area of 24 August 2015 and 29 September 2015 plus a Fibonacci retracement cluster).

However, failure to hold above the 18060 medium-term pivotal support is likely to invalidate the relief rebound scenario to see another round of decline towards the next support at 16950 in the first step.

FTSE China A50 -Watch the 8770/670 support

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Key Levels (1 to 3 weeks)

Pivot (key support): 8770/8670

Resistances: 9045/9200 & 9590

Next support: 8400/8000

Medium-term (1 to 3 weeks) Outlook

The China A50 Index (proxy for the FTSE China A50 futures) has reopened after a week-long Lunar New Year break.  Interestingly, price action has probed the 8770 support (defined by the 76.4% Fibonacci retracement of the last up movement from 24 August 2015 low to 09 November 2015 high and the exit target of the recent “Double Top” bearish breakout).

After a hitting a low of 8667, the Index has managed to stage an intraday rebound today, 15 February 2016 despite a weakening exports growth figure for January 2016 (-11.2% versus -1.4% in Dec 2015).  Technical momentum indicators are hinting of a potential relief rebound for the Index as the daily (medium-term) RSI oscillator has continued to display a bullish divergence signal since 15 January 2016. In addition, the shorter-term (4hour) Stochastic has just exited from its oversold region and still has ample room for further potential upside before reaching its extreme overbought level.

As long as the 8770/8670 medium-term pivotal support holds, the Index may see a further potential rebound to retest the previous 01 February 2016 swing high area at 9045/9200 with a maximum limit set at the 9590 resistance (upper boundary of the descending channel in place since 23 December 2015 high).

However, a break below 8770/8670 is likely to see a further plunge to revisit the 8400/8000 support (coincides closely with the swing low area of 24 August 2015).

DAX – Potential countertrend rally in progress

(Click to enlarge charts)

Key Levels (1 to 3 weeks)

Intermediate support: 8990

Pivot (key support): 8580

Resistances: 9300/485 & 9830/930

Next supports: 8350 & 8100/8000

Medium-term (1 to 3 weeks) Outlook

Last week, the German 30 Index (proxy for the DAX futures) has continued to tumble and almost hit the upper limit of our expected downside target at 8580 (printed a low of 8696, a difference of 1.3%). After a closer examination of its current technical elements and intermarket analysis, we have considered the medium-term downside target of 8580 (upper limit) as per highlighted in the previous outlook fulfilled (click here to recap), the Index is now undergoing a potential countertrend rally.

The steep decline of the Index in place since 27 January 2015 high of 9930 has managed to stall at the lower boundary the bearish descending channel from its current all-time high of 12408 printed in April 2015. In addition, the daily (medium-term) RSI oscillator has flashed a bullish divergence signal close to its extreme oversold level where the Index has staged a significant rebound in the past. Also, it still has room for further upside before reaching its trendline resisistance. These observations suggest that downside momentum has abated and the Index is likely to see a medium-term (1 to 3 weeks) countertrend rally.

Based on the Elliot Wave Principal and in conjunction with observations derived from Fibonacci ratios/projections, the downtrend that started from its current all-time high of 12408 in 12 April 2015 can be labelled as a set three wave corrections of a/, b/ and c/ that is likely to have ended at last week low of 8696 .The Index is now likely to shape a countertrend rally in a set of 3 three waves a/, b/ and c/ of (x), our preferred count at the moment.

The medium-term significant resistance to watch now stands at the 9830/930 region which is defined by multiple elements (the pull-back resistance of a former long-term trendline support from September 2011 low and the median line of the descending channel in place since 12 April 2015 high and swing high area of 27 January 2016).

Given that the Index is coming close to an intermediate resistance zone of 9300/9485 (the former range support defined by the lows of 24 August and 28 September 2015 and now a short-term trendline resistance from 30 December 2015 high) and the 4 hour Stochastic oscillator has already hit its extreme overbought level, it may see a pull-back first towards the 8990 intermediate support before another upleg materializes to target the 9830/930 resistance zone.  Do note that based on the current technical elements seen at this juncture, this potential countertrend rally is likely to be more in terms of magnitude and duration as compared with the previous mean reversion rally seen from 21 January 2016 low of 9254 to 28 January 2016 high of 9927.

On the flipside, failure to hold above the 8580 medium-term pivotal support is likely to invalidate the countertrend rally scenario for a further plunge towards the next support at 8350 before 8100/8000 (key long-term support zone).

S&P 500 – Potential countertrend rally in progress above 1863/51

 

(Click to enlarge charts)

Key Levels (1 to 3 weeks)

Intermediate support: 1863/51

Pivot (key support): 1833

Resistances: 1901 & 1947/54

Next support: 1807

Medium-term (1 to 3 weeks) Outlook

Last week, the U.S. SP 500 Index (proxy for the S&P 500 futures) has staged the expected decline hit the lower limit of our medium-term downside target at 1811 (click here to recap).

Interestingly, technical elements are now advocating a potential countertrend rally to retrace the medium-term bearish trend that started from 03 November 2015 high.

Firstly, the daily (medium-term) RSI oscillator has traced out a bullish divergence signal at its oversold region which indicates that downside momentum has started to abate after two weeks of decline. In addition, the weekly RSI has managed to stage a rebound from its support and still has ample room for further upside potential before hitting the significant trendline resistance.

Secondly, based on the Elliot Wave Principal and observations from Fibonacci ratios/projections (we have managed to get multiple Fibonacci projection clusters from various swing high/lows that pointed close to the 1810 region), the Index is likely to trace out a five waves downside movement from 03 November 2015 high of 2116 (a failure primary wave V, impending mega bearish “Double Top”) that has completed at last week low of 1807. Right now, it is in the midst of undergoing a potential countertrend rally that usually retrace 50% /61.8% of the whole five waves down movement which gives us a potential target for this countertrend movement at 1947/54 (50% retracement) which is also coincides closely with  the swing high area of  13 January and 02 February 2016.

Right now, the Index is now testing an intermediate resistance of 1901 (see 4 hour chart) which is defined closely by a trendline resistance from 30 December 2015 high and the 61.8% Fibonacci retracement of the most recent down move from 02 February 2016 low to last week low of 1807. In addition, the 4 hour (short-term) Stochastic oscillator has reached its extreme overbought level.

Thus, we cannot rule a potential pull-back at this juncture towards the pull-back support zone of the descending channel bullish breakout (see 4 hour chart) at 1863/51 before another round of potential upside movement materializes to target the aforesaid resistance zone of 1947/54.

On the other hand, failure to hold above the 1833 medium-term pivotal support is likely to invalidate the expected countertrend rally and reverse the sentiment back towards the bears to retest the key support at 1811/07.

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