The MSCI Asia Pacific Index may drop 8 percent to a one-year low as it enters the final leg of the rally that started in March 2009, according to an “Elliott Wave” analysis by MF Global Holdings Ltd.
“We’re in a corrective phase,” said Anantha Rajan, a technical analyst at MF Global in Singapore in a phone interview. “The double zig-zag pattern that we’ve seen since the April high is a negative sign.”
The gauge climbed 83 percent from the March 2009 low through this year’s high on April 15, completing a five-phase Elliott-wave rally, Rajan said. Since then, the index has been consolidating in a three-wave pattern called waves A, B and C, he said.
The gauge retreated 16 percent from the April high to the low on May 25, completing “wave A,” Rajan said. A 12 percent climb from the May low through the Aug. 6 high, helped form two consecutive zig-zag patterns within “wave B,” he said.
“The corrective ‘wave C’ started this week,” Rajan said. That wave, along with the MSCI Asia Pacific’s Relative Strength Index falling below the so-called support trendline for May to August, signals a further drop in the market, he said.
The level of the May low, which has provided strong support at least three times since August last year, may again provide a firm base, the analyst said.
The wave principle is a theory developed by accountant Ralph Nelson Elliott during the Great Depression. He concluded that market swings, or waves, follow a predictable, five-stage structure of three steps forward, two steps back.
Elliott said that waves share a variety of features: Wave two never falls below the starting level of wave one; wave three is never the shortest; waves one and five tend to be of equal length; and wave sizes are often related by a series of numbers known as the Fibonacci sequence, wherein each number is based on the sum of the two previous ones.
Technical analysts observe price charts to forecast resistance levels, or ceilings restricting further price increases, and support levels, or floors limiting declines. They use trading patterns and prices to predict changes in a security, commodity, currency or index.