Asian Stocks Head for `Break Down' After 24% Rebound: Technical Analysis

An index of stocks in Asia outside of Japan may be set to “break down” as the gauge nears the end of a rebound from a May low, said CIMB Investment Bank Bhd.

The MSCI Asia excluding Japan Index rose 0.9 percent to 528.93 as of 10:12 a.m. in Singapore, taking gains from the May 25 low to 24 percent. The measure has formed a wedge pattern in its rebound from this year’s low, with the trend lines connecting the peaks and troughs converging.

The rally over the past four months has helped the measure rally above the resistance trend line, a pattern known as a “throw over” in Elliott Wave Principle, CIMB analysts Nigel Foo and Kong Seh Siang said. This may suggest that the wedge is on its final wave, according to the analysts.

“If we are right, the MSCI Asia ex-Japan should break down over the next few weeks,” the analysts wrote in a report today.

Still, the wedge formation currently “remains intact” and a further upturn in the index would signal a more “bullish wavecount,” according to the analysts.

The Elliott Wave Theory was originally developed by accountant Ralph Nelson Elliott during the Great Depression. Elliott concluded that market swings, or waves, follow a predictable, five-stage structure of three steps forward, two steps back.

Elsewhere in Asia, South Korea’s Kospi index also looks to be at the final leg of a wedge pattern that marked its gains from end-May, while China’s Shanghai Composite Index has already entered a “consolidation phase,” with its daily technical indicators have turning negative, according to CIMB.

The analysts said on Sept. 15 the Shanghai Composite was on the verge of completing a diagonal triangle, a chart formation that signals a “reversal” of the gains over the past two months. They said a breakdown below 2,619 points would confirm the start of a “minor correction.”

The Shanghai gauge fell below that level in intraday trading on Sept. 16. The target for the index would now be 2,466, the 61.8 percent reversal on the Fibonacci chart, the analysts wrote in today’s report. The Chinese index added 0.5 percent to 2,603.21.

To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net

To contact the editor responsible for this story: Linus Chua at lchua@bloomberg.net

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