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Spanish Equities Are Reaching a Decision Point


Failure to overcome resistance now may lead to a downturn lasting several months.

Last April, amid pessimistic news reports, we wrote that opportunities might be emerging to go long in Spanish equities. We mentioned that the Dow Jones Spain Titans 30 Index (INDEXDJX:ES30) would probably complete two more small moves, up and down, and then would attempt a larger bounce. That was an example of using Elliott wave analysis to identify the requirements for a completed pattern prior to a turn. The pattern completed, and the bounce occurred basically as we said it would.

Now we see signals that Spanish equities may be ready to turn downward again, based on the Dow Jones Spain Index (INDEXDJX:ESDOW). If price is unable to break through nearby resistance, then it will probably see a reversal heading to new lows below those of last summer.

In the weekly candle chart below, we show two prominent alternatives based on Elliott wave counts. Our primary scenario (labeled in blue) is bearish, calling for prices to reach new lows sometime in 2013 or possibly 2014. If the decline from 2007 to 2009 was the first part [A] of a larger corrective move, and if the advance to the 2010 high was the second part [B] of that move, then the decline from 2010 could be taking the shape of an ending diagonal [C] to complete the corrective move. Price action since the 2010 high is consistent with an ending diagonal, as it is comprised of two three-wave moves lower so far. Resistance at the upper edge of the modified Schiff channel would mark a likely area for the downward fifth wave of a diagonal to begin.

The alternative wave count offers a bullish scenario (labeled in green) which would continue advancing in coming months, while postponing the eventual downturn until later in 2013 or beyond. As with our primary count, the alternative scenario begins with the move down from 2007 highs as the first part [A] of a larger correction. However, the middle part [B] of the larger correction may yet be unfinished. Sub-waves (A) and (B) of [B] appear to be in place. If price continues upward past channel resistance, then it is probably tracing sub-wave (C) of [B]. In most cases, one would expect sub-wave (C) to consist of five moves, and price might now be in the middle of the third of those. The implication of the longer, extended correction described here is that price will eventually have to complete the larger corrective pattern with downward wave [C] beginning at a point much higher than the current area.

Price behavior at the channel line will provide an important clue about which scenario is occurring. If price succeeds in breaking through out of the channel, then watch for a climb to the 343 area, which could be followed by a pause, and then a resumption of the upward direction.
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