The people of Greece have spoken and stock markets are down this morning. The decline is not as severe as I expected so either the decline will extend after 8am or a good deal of the “No” vote was already priced in in which case downside is limited. We will know after 8am.
The result of the Greek vote will have severe consequences in Europe, Greek banks could collapse unless the ECB continues to support them. This scenario has become less likely now that Greece has rejected the conditions attached to the bailout. We are in uncharted territory but one thing is sure, the Greek economy will suffer.
When it comes to trading, bad news is often good news. When countries, economies, stock markets are in distress, central banks will come to the rescue with liquidity. That’s what happened in China today. The Chinese stock market was collapsing last week, today we learn that Beijing unleashed a series of support measures over the weekend to end the stock market rout. The Shanghai composite is up today.
We could see a similar move in Europe, The ECB and the Bank of England could announce new measures to boost the market as a result of the No vote. So despite the sharp decline today, there is a chance we will hear some good news in the next few days and the stock market will rally.
This would be a scenario supported by the wave count because today’s decline completes an Elliott wave and the 34-day BTI is still oversold. As the FTSE is likely to open below the previous low, we can say that last week rally to 6648 was wave iv (circle) inside wave 3 and today’s decline is wave v (circle). This is the final wave inside wave 3, so the move should be wave 4 up. The difficulty here is finding the bottom of wave 3, when the market is in turmoil, the decline can extend therefore it’s not clear where wave 3 will end. A potential area to mark the end of the decline is 6390-6440, then the next move should be a rally to 6600 for wave 4.
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