Europe: Forget Brexit -- Meet "Quitaly"

Forget about brexit. Let's talk about quitaly.

The European union is at a truly historic crossroads and arguments are set to heat up over the summer. Expect more focus on italy as the months go on.

But you can cut through all the noise by being aware of a classic Elliott Wave pattern.

Let me show you how.

A fibonacci 21 years ago, everything looked peachy in the European union. A new millennium was about to dawn, stock markets were at record levels and optimism was high. So high, in fact, that the new eurozone currency, the euro, was officially launched in 1999. One year later, the eurozone stock market peaked, and that top has still yet to be surpassed.

Since then, the European union project has gone through a roller coaster of events, but constant through it all has been a growing sense of frustration from both within and without. For the u.k., that resulted in brexit. Bad news for the European project certainly, but manageable because britain wasn't in the euro. The e.u.'s worst nightmare is a eurozone member state wanting out. That is why the current negotiations over whether to embrace collective fiscal responsibility are so crucial. We all know it. They all know it. Without fiscal union (as well as monetary union), the eurozone is dead.

Now, at this moment, along comes a new political movement in italy with the express aim of getting the country out of the e.u. gianluigi paragone, an ex-member of the anti-establishment five star movement, is set to launch a new political party next month and it may feature the word "italexit" in its logo. To be fair, at this juncture, support amongst italians for a break is relatively low but that could change very quickly if, as we anticipate, social mood is set for another lurch lower in its negative trend.

This chart shows the euro stoxx index, the subset of the stoxx euro 600 index containing stocks from eurozone countries only. As mentioned, the index topped in 2000, just after the launch of the euro. Subsequent to the initial decline in social mood, a number of countries, starting with sweden in 2003, voted no in referenda about either joining the euro or ratifying the e.u. constitution. After social mood improved and people thought the project was on a firmer footing, in 2007 outliers bulgaria and romania were admitted as members of the club. The eurozone crisis blew up post the 2008 financial crash but, as social mood had trended positively in recent years, the eurozone had a renewed confidence at the end of 2019, united against rebellious britain in brexit negotiations.

The pattern that has traced out since the 2000 top has all the hallmarks of an Elliott Wave triangle. That's notable on two counts. Firstly, once it is complete, and it should be in the final wave lower now, a new, multi-decade bull market should begin. Secondly, and interestingly, the final waves of large degree triangles are often accompanied by dramatic news. Expect the next couple of years in europe to be seminal in its history.

If this Elliott Wave pattern is correct we can expect a huge amount of drama in europe this year and next.

But remember, it could also show a road map for, ultimately, one of the best opportunities in a generation.

You can follow all the twists and turns in the European financial forecast service.

Frost & Prechter's 1978 classic, Elliott Wave principle, key to market beaviour, contains rigorous descriptions of all the wave patterns that ralph Elliott identified back in the 1930s.

The section on corrective waves starts with the simplest -- the iconic zigzag.

A single zigzag in a bull market is a simple three-wave declining pattern labeled a-b-c. The subwave sequence is 5-3-5, and the top of wave b is noticeably lower than the start of wave a.

In a bear market, a zigzag correction takes place in the opposite direction. For this reason, a zigzag in a bear market is often referred to as an inverted zigzag.

This chart shows the broad European stock market index, the stoxx europe 600, which contains stocks from both eurozone and non-eurozone countries.

After the crash in february and march, stoxx 600 made a five wave advance followed by a three wave correction. We label that movement waves a and b.

The index has subsequently advanced in another five wave sequence making the entire advance from march a textbook inverted zigzag pattern.

The index has now retraced 0.618 of the crash, and second waves often retrace deeply, into the retracement zone of between 0.618 and 0.786.

So we can't rule out a further advance in the short-term, perhaps up to the Elliott Wave channel resistance, formed by connecting the start of wave a to the end of wave b and paralleling that from the end of wave a. However, we are currently on reversal watch.

One of the neat aspects about zigzags is that they give us a clear pivot point. If the march low was the end of the bear market, and the initial five wave up three wave down movement was waves 1 and 2 of a new bull market, the index should not now move below the end of the first five wave movement. In this case, that level comes in at 349.22.

In conclusion, therefore, the broad European stock market looks like it has traced out a classic corrective wave, but 349.22 is the key to the puzzle.

When the ftse 100 index topped out in july 2019, we labeled that high as the end of an intermediate degree wave (2)

After a low in august 2019, the ftse staggered sideways over the next six months in what we identified as a combination correction, w-x-y.

The really crucial aspect for us, was that the 17 january high did not exceed the july 2019 high.

Therefore, it was highly likely that the january high represented the end of minor degree wave 2, which would mean that a decline in minor wave 3 of intermediate wave 3 was probably starting.

On 29 january, the European short term update addressed that potential, stating that, "if our wave count in the ftse is correct, a dramatic decline should unfold over the next few weeks."

The power of the Elliott Wave principle often takes your breath away and this occasion was definitely one for the history books.

We label the most dramatic wave of the crash as minute degree wave ((iii)) which ended in a truncated internal fifth wave on 23 march.

The rally from that point looks to be developing as a classic zigzag with wave (b) as a triangle.

The rally may appear strong to non-Elliott Wave practitioners, but it has not even retraced 38.2% of minute degree wave ((iii)), and that's why we think the correction is still only minute wave ((iv)) of minor wave 3.

The conclusion is that the ftse's decline is far from over and we expect to see another collapse taking the index well below the march low before another pause in the downtrend is found.

Even then, the overall deflation of the ftse is only just getting started.