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Whither
the World Stock Index? To understand what’s happening in the global equity markets right now, we suggest you begin with the lead chart in this month’s Global Market Perspective. It should make any technical analyst (or investor seeking an opportunity) salivate.
As you see, the World Stock Index (WSI) shows prices from late 1998 to the present, unfolding in an unmistakable “head and shoulders” pattern. This chart is actually making a forecast – it’s worth your time to take a moment to understand. In his book, Technical Analysis Explained, renowned technician Martin Pring explains: "The head and shoulders (H&S) is probably the most reliable of all chart patterns … The pattern consists of a final rally (the head) separating two smaller, though not necessarily identical rallies (the shoulders). The first shoulder is the penultimate advance in the bull market, and the second is, in effect, the first bear market rally." Note that the first “shoulder” in the WSI begins in January 1999. The most recent declines completed the second “shoulder,” and in fact severed the “neckline” drawn on the chart. Typically, the longer it takes the head and shoulders to form, the more significant the turn. This head and shoulders calls for the WSI decline to carry to near its low of just under 900 in 1997, based on a move equal to the distance from top of the head to the neckline that starts from where the neckline is now. The important technical pattern we see at work in the WSI can be a very profitable adjunct to the Wave Principle. It confirms the Elliott labels that are also on the chart. Note the clear fifth wave peak, and that we’re now in a third wave down (third waves are very powerful). The World Stock Index isn’t tradable, yet it suggests what the general trend for the world averages will be: in turn, we look to the Elliott patterns for each individual major index and make a forecast. Report courtesy of Elliott Wave International.
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