Asian Indices Poised for New Declines in 2016
10/21/15 Weekly Re-Lay Alert: “Anyone that has read more than a month’s worth of publications should recognize that I have an acute case of ‘Correlation Aversion Syndrome’. It is NOT that I want to ignore ongoing correlations – whether they be market-to-market or fundamental-to-market, etc. – and it is NOT that I dismiss their value.
It is simply that I see more danger – then benefit – in relying on them for trading purposes. And that perception intensifies – almost exponentially – as the window of time (for said correlation) narrows…
Buying and holding a particular stock for 3–5 years, because of a correlation to a particular fundamental factor, is one thing. If the correlation is even close to accurate, the trade probably has a better chance of success. BUT… at the opposite extreme…
Day-trading Gold based on a perceived correlation to the Dollar – or Stock Indices based on a correlation to Bonds – requires too wide of parameters (in which to determine if the correlation is still intact or has shifted for the day) to make for a reliable trading approach with proper risk control.
In those cases, the argument (as to whether or not the correlation is still intact) is usually a moot point… since there are so many other ways in which the ambiguity of it can hurt a trader. So, maybe we should term the malady: ‘Correlation Reliance Aversion Syndrome’.
With that context, there are many ways that I DO use correlations, even though I would not term that as ‘relying’ on them. In many cases, like that which I am about to describe, it is a case of discussing a possible scenario that could unfold – based on generally-prevailing correlation… and the assumption that will continue.
The cycles & technicals are already giving some indication of that scenario’s possibility, so it is more a case of outlining a scenario that would corroborate what the indicators are already concluding.
So, where am I heading with this slightly cryptic discussion? East. Far East.
The activity in 3Q 2015 demonstrated the role that China, the Yuan & the Shanghai Composite can play – and are likely to play – in 2015/2016 Crash Cycles. In a matter of ~2 months, the Shanghai Composite shed 40% of its value – giving one of the most convincing validations to the Capitulation cycles in May–August 2015.
Global Indices followed.
In doing so, it fulfilled the projections for a drop below 3100 – a critical downside target & 6–12 month support level. This came after it gave a textbook example of ‘support turned into resistance’ – dropping below its May 2015 low (and 4th wave of lesser degree support) at 4112… and then rebounding to retest that level (topping at 4123) before resuming its decline.
Funny enough, that intervening spike low bottomed at 3507 (in early-July). It was then followed by the ~600 point rebound (to 4123) and then broken, leading to a drop of ~600 points below it (to 2927)… also a textbook example of Gann ‘squares’ of price moves (~600 pts. up/~600 pts. down)…
However, the cycles are what really intrigue me…
On a longer-term basis, the first half of 2016 is when a multi-year low could take hold. One of the larger cycles projecting this is an ~11-Year Cycle connecting the lows of 3Q 1994 & 2Q 2005. The next phase of that cycle occurs in 2016. If you view that as a 43-Quarter Cycle – 11 years minus 1 quarter – it would project that low for 1Q 2016. (With the scarcity of data points, this cycle demands some ‘leeway’.)
That is corroborated by a 5-year pattern – a ~360-degree cycle – in which the Shanghai has set 3–6 month or 6–12 month lows in late-Jan/early-Feb. 2011, 2012, 2014 & 2015 with an intervening high in early-Feb. 2013. That results in a ~360-degree high (Feb. ’13)–low (Feb. ’14)–low (Feb. ’15)–low (Feb. ’16) Cycle Progression targeted for February 2016.
And that is reinforced by a simple division of its manic period – since the 1Q 2014 bottom. Basically, the Shanghai Composite experienced a ~16-month bubble – into June 2015. If it experiences a subsequent ~8-month crash (the crashes are often twice as fast as the bubbles) – and retraces 50% in time – it would bottom in 1Q 2016… ideally Feb. 2016…
Ultimately, this decline (since June 2015) could last into 1Q 2016 (Feb. 2016 is greatest synergy of cycles) and see that Index return to the base from which its bubble began – around 2,000.
At the same time, the Nikkei has dropped sharply (shedding ~20% since June 2015) after rebounding to the highs of the century (& millennium), retesting its early-2000 peak around 20,800.
Most indications are that it could ultimately make it back to ~13,000… in 2016..The Hang Seng Index has given similar signals as it rebounded to within ~150 points of its January 2015 low (support turned into resistance and the neutral point for the intra-year downtrend).
So, at least three key Asian Indices have corroborated what is being seen in US Indices – rallying to pivotal levels of resistance and into a pivotal time frame, when a secondary high is likely. The Shanghai could be giving some additional timing clues for the next (expected) breakdown… potentially culminating in February 2016.”
Shanghai Composite, Nikkei & Hang Seng Poised for New Declines into February 2016. Hang Seng nearing decisive resistance – around 23,300 – as cycles portend peaks in the coming week(s). US Indices pinpoint late-Dec. as start of next bearish cycle.