Phisix Elliott Wave Principle Analysis

The last time I updated this webpage was last April 13, 2009 and I stated that there was going to be an opportunity for the bulls to make money. Although I knew there was going to be an opportunity on the long side of the market during that time, I never expected that the opportunity would be a big one. Who would have known during that time that the market was going to climb all the way up to 3130? At that time, the PSEi was merely trading below the 2100 level. Right now, if I'm not mistaken, the market is now trading at the other end of the spectrum. Let me explain in detail below.

First, let's look at the big, big picture of the market - the Supercycle. Feb 7, 1997 marked the end of wave 1 in the PSEi's Supercycle. This was followed by a nasty wave 2 (the Asian Financial Crisis), which actually ended on Oct 26, 2001, if I'm not mistaken. From that point on, the market has now been trading within a wave 3. Take note, wave 3 is the most bullish among all the waves according to the Elliott Wave Principle. The chart below shows this perspective.

charts are courtesy of Metastock

So, where are we within the wave 3 of the Supercycle wave? I think we all know that the move from 978 to 3896 is a wave 1 within the wave 3 of the Supercycle. That is a given. Let's just call this sub-wave a Cycle wave. Now comes the tricky part and this is what is debatable among Elliotticians at this point of the market. The question that is bugging the mind of every Elliottician right now is this:

When the market dropped to 1684 last Oct 2008, did it mark the end of the wave 2, or, was that simply a wave A within the wave 2?

The Bullish Scenario - 1684 is the end of the wave 2

charts are courtesy of Metastock

If 1684 marked the end of the wave 2 in the market's Cycle trend, then, this would mean that the market is now actually trading within a 3rd of a 3rd wave. The move from 1684 to 3130 only represents the first wave of a five wave upmove. While the market may experience a small correction in the near term - a wave 2 in the Primary trend, the bullish bias of the Cycle trend will still tend to dominate.

In terms of price, this scenario looks perfect already. There is only problem I see that makes me doubt of this scenario - Time. In terms of time, the market's corrective phase doesn't seem like it has concluded already. What do I mean? The beginning of wave 1 in the Primary trend of the market was Oct 2001. This wave ended in either July or Oct 2007. That's a six year wave 1! On the other hand, if wave 2 ended on Oct 2008, the correction of this six year wave 1 would have been just 13 or 16 months?

I just can't seem to reconcile the fact that the market went up by 6 years, would correct by only 13 or 16 months, and would start to trend up once again?

So, if 1684 wasn't the end of a wave 2, then, what was it? In my opinion, it was simply the end of a wave A within a wave 2.

The Bearish Scenario - 1684 is the end of the wave A within a wave 2

charts are courtesy of Metastock

It is stated in the Elliott Wave Principle that the most destructive wave of all is a wave C. If this is true and we are near the end of a wave B, then, one ought to be very, very, very cautious of the markets right now. Let's recap: In the Supercycle trend of the market, we are currently at wave 3. Within that wave 3, the market had just finished its wave 1 at 3896, thus, we are now either in wave 2 or wave 3 on the Cycle trend of the market. If 1684 marks only the end of wave A within the wave 2 of the Cycle trend of the market, then, we are now nearing the end of a wave B within the wave 2. The coming wave C will have the potential to give back 68.1% or 75% of the gains that the market made in wave B. That would mean that, if the market has already peaked at 3130, prices can now drop to as low as 2050 to 2250 in the coming months ahead.

Let's go one time-frame lower and look at the short-term trend of the market - the Intermediate cycle.

charts are courtesy of Metastock

The market has certainly exceeded everybody's expectations in this current run of the market. Obviously, we did not only see three or five waves. Thus, this current run of the market is obviously an extension. As stated in Elliott Wave Principle, an extension usually has nine waves. If so, by looking at the chart above, we are now nearing the end of this spectacular run of the markets. In fact, if my count is a bit off, we may even have already seen the peak at 3130. But, I'm still giving it the benefit of the doubt and think that there may still be one more rally before it actually ends - possibly a final blow-off to mark the end of its 9th wave.

I know what you are thinking - wave B cannot be an extension, according to the rules of the Elliot Wave Principle. True, however, since we are merely looking at the intermediate trend, this might simply be an anomaly, which would sort itself out later on. Of course, there could also be one last scenario that could happen - the market is still currently within a wave B but is simply within a wave A within the wave B. The chart below will explain this scenario further.

The Moderately Bullish Scenario - 1684 is the end of the wave A within a wave 2 but we are currently just half-way thru the wave B

charts are courtesy of Metastock

In this scenario, the market is merely at the end of a wave A within the wave B in its Primary trend. If so, after a shallow correction of the market, possibly down to around the 2600 level, we may see the resumption of the bullish trend of the market to complete the wave B in its Primary trend. The completion of this trend may result in the market eventually heading back near its all-time high at 3896. However, after completing wave B, prices may then complete the wave 2 in its Cycle trend and bring the index back down for several months thereafter. This entire cycle to complete the wave 2 in the market's Cycle trend may take an approximate time of 3 years or so. With the market having climbed for 6 years from 978 to 3896, a 3 year correction would not be impossible and may actually be ideal.

In summary, here are the three scenarios that I have described above. I have given each of these scenarios their probabilities of occurring:

A. Bullish Scenario - 40%

B. Bearish Scenario - 40%

C. Moderately Bullish Scenario - 60%

Whatever the case may be, whether the market is currently near the end of a wave 1 in its Primary trend or whether it is currently near the end of a wave B does not really matter, that is, from a practical trading point of view. The important thing is, we know that a wave is nearing an end and a corrective will occur very, very soon. Now, whether this coming correction will be a shallow one or a deep one is the question that nobody can answer with 100% certainty at this point.

Don't get me wrong though. I am bullish in the markets in the long-term. Remember, we are in a 3rd wave in the market's Supercycle trend. Thus, once this coming correction is over and done with, we may see the beginning of a truly lasting bull market, which may end with the market going towards 5000 or even higher.

For the meantime though, I suggest that you start fastening your seatbelts as we may experience some rough roads ahead.