SMI, Swiss Market Index

smi jan 15 2015

Overnight the Swiss market dropped from 9277 to 7932 or about 14.4%, but that is in Swiss Francs so the only investors that are caught with their pants down, so to speak, are the Swiss themselves. Foreign investors get roughly the same amount back as a result of the appreciation of the Swiss Franc. For them nothing much changes other than that a vacation to St. Moritz will cost an even bigger fortune.

Was this all predictable from an EW perspective. Yes and no, see our previous blogs. But with hindsight it all fits pretty well. What we are looking at (in Swiss Francs) is a, give or take, 10+ year flat. Appropriately called that because in the end you end up where you were after the first down leg. The structure is basically a 3-3-5 A-B-C. We started the C overnight. C’s are always 5-wave moves.

The intervening up-leg , the B-wave, subdivides in 3 waves, an a-b-c. Often the c is 1.618x the a and in order to be flat it should end approximately at the double top level. It does all that! Furthermore the 5th wave of c of B is very often a “diagonal” (in English a wedge). In this case it is an expanding wedge as the amplitude increases as it nears the end (see our earlier blog on this aspect). Notice also the overlaps that can only occur in this pattern.

All this does not bode well for the Swiss, and with it , other markets. There are few reasonable alternative counts. The most obvious one would be that we are in a 5th large up wave from the lows of the great recession. In that scenario the overnight drop is the beginning of a 4th wave which might go to 7400 but not below 7000. Then the 5th of the 5th would take us to new highs around 11000 or so. This might be a possibility but it is not a good basis to be long this index.