Market Briefs & Sentiment Outlook (MBSO)
Reported by Tony Carrion

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July 23, 2010

Should You Invest In China & Japan?

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July 3, 2010

Death Crossing the Rubicon

It was just about this time last year as stocks were pulling back from the first big rally off the March 2009 lows that many a technician was anticipating a Golden Cross, which occurs when a shorter term moving average crosses above a longer term one. Probably the most widely watched Golden Cross is the 50-day moving average crossing above the 200-day.  Depending on which index, most of these crosses occurred between July-August last year.  The significance of the 50/200 day Golden Cross is that it tends to imply an intermediate term sustainability of an uptrend.  Indeed, and allowing for the brief corrections that occurred, stocks stayed generally elevated for the eight or so months that followed the Golden Crosses.  With stocks down nearly 20% from the April highs, is the global stock market now set up for the reverse - a Death Cross?

The chart above is The World Index (data courtesy MSCI-Barra) which reflects the performance of a number of global stock markets.  The blue line represents the 50-day moving average, and the green line is the 200-day.  We use exponential rather than simple moving averages, which are forward-weighted and more sensitive to price changes.  On the left hand side of the chart, we can see when the Golden Cross occurred in July 2009, and as the chart indicates, global stocks generally retained their upside bias over many months.  On the right hand side, we note the Death Cross, when the 50-day slipped back below the 200-day on June 7th.  Presumably, the implication is that global stocks will reflect an intermediate term downside bias, allowing for the periodic relief rally, or essentially the opposite of what we saw between July 2009-April 2010.  Below, we look at a number of different (and somewhat randomly selected) stock indexes, some of which have experienced their Death Cross, some imminently so, and others still resisting.

Asia

The chart of China's Shanghai Composite shows a Death Cross that occurred on May 10th, almost a year after its Golden Cross. The index is down more than 13% since the cross occurred, and more than 30% since its August 2009 high.  

The weak sister of the Asian group appears to be the Nikkei, which had a "near death cross" in December, but saw the light in time to resist a full cross until June 9th.  The reason for the greater we weakness we believe is due to the secular bear market that the Nikkei has been locked in for 21 years, as Japan's economy has continued to struggle with low to no growth and deflation.  Our long-term Elliott Wave model still sees a return to the 5000 area for the Nikkei before its secular bear market may finally end.

Thus far, India's Sensex Index has resisted a Death Cross, and the relative steadiness of it's 50-day suggests it isn't likely to do so anytime soon.  It's Golden Cross occurred way back in May 2009, and has remained intact now for 13 months.  However, this doesn't mean the Sensex isn't without its challenges.  The index has remained rangebound since last October, and bottled up just beneath the 78.6% Fibonacci retracement of its January-October 2008 bear market decline.  The path of least resistance may therefore be a move lower, which would be confirmed with a significant break of it's 200-day and trendline support.  While we're bullish India on a secular basis, its current inflation rate of over 10% should prove to be a negative for Indian stock prices.

Europe

With Germany representing the Eurozone's strongest market and economy, its Dax Index has thus far resisted the Death Cross.  One thing that still makes it possible is its failure to break above the 61.8% retracement of its 2007-2009 bear market decline.  Its advance off the March 2009 low still counts under our interpretation as a Wave (B) within a secular bear trend, and as the chart suggests, the entire advance, including that following the Golden Cross last August, has been corrective.  Thus far, the 200-day moving average has contained the downside, so any significant break should ultimately see the cross occur.  

Spain's debt issues have helped send it's stock index down some 23% since January, and a good part of that following its aborted rally and Death Cross in April.  The 1100 area should prove challenging on any attempted recovery from the current correction.

USA

The US stock averages have thus far resisted the Death Cross, though as the Dow-Wilshire Total Stock Market Index suggests, the cross may still be imminent.  The current pattern is virtually identical in the large cap indices, but a little less so in the small and mid-cap.  However, in both cases, the direction of the 50-day moving average has been down, and perhaps a full cross may only be just weeks away.

As history tells us, when Caesar crossed the Rubicon, it represented the point of no return.  In relating the old saying to our theme this month, just as the Golden Cross supported the March 2009 inflection point on an intermediate term basis, the actual or imminent Death Crosses support the argument that the April highs were a bearish inflection point of at least intermediate term significance.  Consequently, where pullbacks during pre-April phase resulted in relatively small percentage losses against bigger upside gains, the implied shift in bias since April is likely to produce the opposite - rallies of smaller percentage gains against declines of bigger percentage losses.  As always, forewarned is forearmed.

For regular, ongoing commentary on the Elliott Wave trends in all the major markets, be sure to visit our good friends at Elliott Wave International.

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