STI now going to Elliott Wave 5

The chart of the STI above shows a wave count that conforms to the textbook definition of Elliott Wave. Right now, waves 1 through 4 have defined themselves clearly. Price action has unfolded in accordance to the Elliott Wave sequence.

Wave 1 was the initial run up from the 1455 base. Wave 2 was a directional countertrend move that corrected wave 1 starting from the 1950 region. Wave 3, which is typically the sharpest of the 5 waves, ran up to the 2424 level. Wave 4 was the messy sideways market we saw for about 2 and a half months from May09 to mid July09.

This puts us into wave 5, which is typically the last wave of the sequence. The run up of wave 5 has taken the STI up to the swing high of 2700 region where we saw the STI corrected from. We wrote in our weekly reports that the top at 2700 is too small to be a long term top. In other words, wave 5 is incomplete and unfolding. It thus stands to reason that the trend can still continue and there is a decent chance of another push to the upside before we should consider whether this entire rally has run out of steam. Possible targets are 2700 and 2744.

Perhaps the key point of this report is that the STI and Dollar Index are both in the terminal phases of textbook like Elliott Wave sequences. This allows us to forecast the STI from an individual stand point and also an inter-market one.

From an inter-market perspective, we know that a strong Dollar typically leads to a weak commodity market and in turn, this weighs down on equities. Should the Dollar bottom and the STI top occur around the same time, we might see the magnitude of the STI correction get magnified by the strong Dollar-weak CRB relation.

When wave 5 completes itself, trends usually undergo at least a sizeable correction. At this juncture, waves 1 to 4 have unfolded clearly in the Dollar & STI and this almost certainly puts us in the region of wave 5. (We will avoid sub-wave counts of wave 5 to avoid ‘staring at the tree and missing the forest’)

For the STI, there should be another leg to the upside as wave 5 unfolds. The STI price targets are 2700 and possibly 2744. To mark the start of the correction, what we are looking for is a broader scale topping formation such as a double top divergence spanning perhaps 2 months.

A top of this scale should be sufficient to precipitate a decent sized correction, especially if the Dollar begins to strengthen at the same time. Even more so if the STI top/ Dollar bottom occurs during September and October which are months where we typically see strong seasonal weakness in equities.

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