What we have seen over the last few weeks has been text-book Elliott Wave material. Throughout the last two years we have seen many five wave impulse set-ups but the counts changed and the wave five leg down did not happen as optimism took over - perhaps not so much from a deep belief in the underlying fundamentals, but rather (I suspect) because of loose money not wanting to miss the boat. This is a good way to lose money.

This time around a wave five low is in the making - and the question is: How low can the market go?

Most weekly Elliotts suggest a range-trading market but the daily Elliott points to further weakness:

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The next level we look for is about 4,400 - about 150 points away - and after that we can review the next move. There is no need to lock in an expectation of a certain low – low. Just review the situation at each key stage.

I do think that 4,200 is a prospect. At this level a few players who added to their positions in the last couple of years will be flushed out and we could see the market fall to the next level of support, which is around 4,000. There is potential for some panic selling but we will have to wait and see.

The daily and weekly Elliotts are not inconsistent. Falls projected in the daily Elliott can mean range trading - just within a lowered band of the range.

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At this time I am inclined to the view we are unlikely to see a major capitulation but neither am I saying this will not happen. We don't have to make that call yet but we must keep an eye on indicators.

At this point I would say range trading is a more likely scenario.

Great news for traders - but mighty frustrating for investors who will be cornered into caution.

Enjoy the ride

Tom Scollon

Chief Analyst