Elliott Waves: Asian Stocks Poised for Steep Correction

(Bloomberg) -- Asian stocks are due for their “largest correction” since rallying from their March lows as the region’s major indexes complete “intermediate tops,” according to Elliott Wave International Inc.The benchmark MSCI Asia Pacific Index has climbed 62 percent from a more than five-year low on March 9 on speculation stimulus packages and lower borrowing costs will revive the global economy.Australia’s S&P/ASX 200 Index looks “bearish” because it has advanced for three-consecutive waves, according to Elliot Wave International’s monthly Asian-Pacific Financial Forecast report released on Aug. 28. “That puts it most at risk of a deep retracement.”

China’s Shanghai Composite Index and South Korea’s Kospi Index are “breaking down,” according to the research company. The Chinese gauge was the world’s best-performing major index until it peaked at 3,478 on Aug. 4, after a five-wave rally that began in October. The weakness in the Kosdaq index signals a decline in the broader market, it added.“When secondary indexes weaken, it often signals that the market’s speculative ‘animal spirits’ are waning,” Elliot Wave International said in its monthly Asian-Pacific Financial Forecast report. As in South Korea, a similar trend is developing in China where the Shenzhen Small and Medium Enterprises Index has fallen below the “lower channel line.”

Channel lines mark upper and lower price trends, with the upper line indicating resistance and the lower line support. If the price breaks out of the channel, it may indicate a new direction for prices.The Elliot Wave principle is based on 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.In addition, the 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.