PSEi (Chart: Daily Resistance: 4050/3970/3870 Support: 3700)
The index had the biggest drop in a day since Oct of 2008. This floored my jaw as my hopes were shattered for the index maintaining a sideways movement.
The previous support near 4130 and the 130 and 260 day moving averages were also wiped out last week.
On hind sight, the drop is expected as the index has formed a head and shoulder formation whose neck near 4129 was broken last week. The target level for the head and shoulder formation is near 3700.
Counting the Elliott wave, we are now on the 3rd bearish wave and based on projected length of wave 3 which is 162% of the length of wave 1; this wave may reach up to the same level as the target level for the broken head and shoulder formation which is also 3700.
For the current index level at 3885, we still have way more space to drop to reach near 3700, so buckle up for further downward movement next week.
Observing the RSI, the index is now way oversold. The typical reaction to a very oversold equity is a bounce up once it goes below RSI 30. At current, RSI is now at 21, so we may also see a bounce up by next, but I don’t expect this bounce to be the 4th wave. This would probably be a short bounce with a little sideways movement.
Assuming the 3rd wave reaches the level near 3700, the 4th wave is projected to top anywhere between 3870, 3970 and 4050 (24%, 38%, 50% of the length of wave 3; Green bar on the graph).
In conclusion, we’re definitely on a bearish cycle now, so if you were stuck and wanted to get out, the 4th wave maybe the chance for you to move out of your positions. There is opportunity to profit riding the 4th wave, but for the risk averse, it would be best to continue sitting on the sidelines.
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