NZX 50 is New Zealand’s benchmark stock market index. It was created in 2003 and includes the 50 largest companies in the country. We stumbled on it while researching one of its components – The a2 Milk Company – but that’s another story.
NZX 50 climbed to almost 13 000 earlier this month, up 58% from its March low of 8209. Like many other stock indices, it is currently trading near all-time highs. Does this mean this is a good time to join the bulls heading into 2021? In order to find out, we need to take a look at the bigger picture.
The weekly chart above reveals the index’ entire development since 2003. It looks like a textbook five-wave impulse has been forming during the past 17+ years. The pattern is labeled I-II-III-IV-V, where wave III is extended. Wave II stands for the 2008-2009 Financial crisis, while wave IV corresponds to the coronavirus panic earlier this year.
A Turbulent Year Ahead for New Zealand’s NZX 50
What should worry the bulls is that according to the Elliott Wave principle, a three-wave correction follows every impulse. Corrections usually erase all of the fifth wave’s gains. For NZX 50, this means a drop to the wave IV support area near 8000 can be expected once wave V is over.
The RSI indicator supports the negative outlook with a strong bearish divergence between waves III and V. In addition, NZX 50 currently holds a P/E ratio of almost 40, making it one of the most expensive indices out there. If this analysis is correct, this might just be the worst possible time to invest in New Zealand’s stock market.