Sunday, November 27, 2011

Japan "Meltdown", or Melt up? The Elliott Wave Hound thinks the latter

I found this article posted over the weekend, on the Market Oracle website - of which I'm a big fan - from fellow Elliottician Adam Brochert, entitled  "Japan Stock Market Meltdown, Screaming From the Rooftops" link provided. 

For educational purposes, and to show how 2 different technician's can look at the same chart and come up with 2 totally opposite Elliott Wave Interpretations, I thought it would be fun to compare notes. 

There are several relevant indices which may be used to chart Japan, but for purposes of comparison we're using the $NIKK (Tokyo Nikkei Average).

First let's take a look at Adam's Chart:

 Going by Adam's notes I can only assume he's expecting a crash into "p-3", as many R. Pretcher fans are. He also states in his article, "we're looking at a crash-type scenario in the Japanese stock market".

The problem I see with this theory is that P-3 velocity should have surpassed that of P-1 (with took only 5 months to complete). Since we're in our 9th month of sideways to down action, I have since ruled out P-3 on timeline, and velocity alone. P-3 waits for nothing and nobody.

Granted the low lower channel has been broken, but I believe there's a simple explanation for this, which I'll get into in a moment.

Here is my interpretation of the same chart: For accuracy I've chosen to use the daily candlesticks view, rather than the weekly view:

1. I believe we're only seeing the completion of wave B (consolidation) in a contracting triangle. Elliott Wave Rules allow wave "e" to be a triangle only when the larger "pattern is of the same type". 
2. Wave E's are known to cause panic and we've seen plenty of that over the past few months. 

3. Wave E's also commonly washout below the target in what is referred to in elliottwave-speak as a "throw-over". 
4. A contracting triangle can only be one of 3 things

5. Wave C should look like wave A, although stronger.

Same pattern can be seen on the $INJ:

 The $JPN:

 We may see another day or 2 of what has become the routine washout at the open - orchestrated in pre-market - but trying to anticipate daily market moves, and focusing too much on the short term is a recipe for disaster. All EW requirements for wave E have already been met.  

Hot Damn I'm Bullish on Japan; so bullish, that I even went so far as to drop 50% of my fiance's 401 k into a Vanguard Pacific Fund on Friday. I'm long Emerging markets and financials.  

For more information on Contracting triangles visit elliott wave international and see:

Contracting Triangles: Explosions of Excitement

Anthony Allyn is the Elliott Wave Hound @ a subsidiary of Elliott Wave Hound Inc.