Saturday, March 5, 2016

Has STI Bottom ?

As a follow up to the previous post, How Low Can STI Go ? and with FTSE STI closed at 2,837 on 4th Mar 2016, some interesting event has triggered.

Recap of the previous projection based on Elliott Wave, STI was in wave C sub-wave 3 with sub-wave 4 and 5 to go before eventually hitting the bottom.  However, referring to the chart below, there is a violation in the Elliott Wave count.

As FTSE STI rose to 2,837 in presuming wave C sub-wave 4, it has overlapped wave C sub-wave 1 (shown in the yellow region).  This has violated one of the rule of Elliott Wave, thereby invalidate the previous wave count.  That could mean STI 2,530 occurred in January and February 2016 was the bottom of the down wave ABC.  Though the length of wave C seemed rather short in both magnitude and time frame but there isn't any rule saying it is not allowed.  This has led to a re-count as shown in the below chart.

The re-count shown the 5 sub-waves 1,2,3,4,5 with STI 2,530 as the bottom being played out for wave C.  As such, the current rally should be the new uptrend wave 1 (the blue arrow) of wave 1,2,3,4,5.  Question is how high can wave 1 goes ?  Well, there isn't any rule in Elliott Wave to define that (not that I know of) but the peak of wave 1 could be around the 2,900 region (as shown in the yellow region).  Why ? There are some reasons to it.  If you referred to the 2008-2009 GFC, the peak of uptrend wave 1 ironically same as the peak of wave C sub-wave 4 (sorry no chart to show here).  Another reason to support that is by looking at the 2 charts below.

The above 2 charts zoom in to the region from wave C sub-wave 4 to the uptrend wave 1.  The top chart is the familiar Inverted Head-and-Shoulder pattern while the bottom chart is the Cup-with-Handle pattern.  These 2 patterns are bullish pattern.  

Firstly, for the Inverted Head-and-Shoulder pattern, the left shoulder is the wave C sub-wave 4, the head is the bottom (STI 2,530) and the right shoulder should be the uptrend wave 1.  The neckline if it is a symmetrical pattern will be the peak of wave C sub-wave 4 (ie around STI 2,900) meaning the uptrend wave 1 should pull back at that level to start to form the right shoulder and that is exactly the uptrend wave 2 to uptrend wave 3.

Next, for the Cup-with-Handle pattern, the rim of the cup shape starts from the peak of wave C sub-wave 4 with the bottom as the base and peak of uptrend wave 1 should form the other rim of the cup.  The handle of the cup is a pull back which is the uptrend wave 2 of Elliott Wave.

The peak of uptrend wave 1 could be other value too but no matter what value there need to be a pull back if not Elliott Wave Theory will no longer valid.  There are good and bad about Technical Analysis.  The bad is still not able to pinpoint the exact bottom but the good thing is its ability to capture the clear direction like the case of missing the bottom of wave C but still can get it during uptrend wave 2.

Some might start to feel FOMO (Fear Of Missing Out) given the strong rally just after CNY but not to worry if you are strongly convinced that STI has already bottom as the pull back uptrend wave 2 is the buying opportunity.  How much will the pull back be ?  Something for you to read up on, it got something to do with Fibonacci number (you can easily google search Elliott Wave and Fibonacci number to find the answer).

Can the above new re-count be invalidated again ?  It is possible if the pull back uptrend wave 2 falls below the bottom of uptrend wave 1 (ie STI 2,530).  To achieve that some unexpected event must have happened (probably like start of WWIII or another deadly virus like SARS in 2003, etc).

Why the bottom ended so abruptly ? There is reason for it and this is due to the "Lost Decade" scenario I described in early 2015 (Recap 2014 & Looking Ahead 2015).  In this scenario global economy is weak that there is no underlying strength to move the growth higher but not weak to the extend of another global recession.  Somehow and somewhat at the brisk of recession an action was done to prevent it resulting in global economy being trapped in a range bound fashion.  This I believe has to do with the macroeconomic Long Run Equilibrium Line (LREL).  First, the 2008 GFC has caused the LREL to shift out of its equilibrium position.  Theoretically, a monetary and/or fiscal policy being applied can move its back to the equilibrium position however if the equilibrium position has shifted to a new position then no matter what policies being applied still couldn't get it back.  Either the policy makers fail to realize the new equilibrium position or they know but no idea as to where exact it is and what the best policy to move it back.  The latter case will result in trial and error type of solution to get it back to the new equilibrium position.  Trial and error method is very time consuming and could spend decade to finally get it right.  During these periods, global economy enters to a low interest rate environment (now we even have negative rate), low inflation and no strength in growth.  This is what I termed as the "Lost Decade".

The "Lost Decade" scenario is the most difficult to invest as you can hold back to invest thinking there will be another global recession but never get one.  Fear also appears that after invest if a real global recession occurs, the share price could drop another 20% to 50%.  Retail investors do not have unlimited capital and hence stuck in a catch-22 situation.  You might argue turn to fundamental and valuation to invest example last month local bank stocks have fallen to a PB ratio of 1 or less.  You might think it is cheap but if another global recession really occurs (at that time it looked very possible), they can fall another 20% to 50% and do you still have more capital to average down ?  That is why TA might come to handy for the "Lost Decade" scenario.  You can miss the bottom but you won't miss the chance to get.

For any long-term investors (like myself) should not have anything to worry about because still vested and nothing to miss out of if the direction is the new uptrend.

1 comment:

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