In this opportunity, we won’t talk about the importance of water for life. This time we will apply some Elliott Wave Theory concepts to make a panoramic review of this sector.
NASDAQ OMX US Water Index – Close to its Fifth Wave Completion
The US Water Index started in the second half of 2011, developing a decline until 753.82 pts in September 2011. After the drop to this level, the index started a bullish cycle which is running the fifth wave.
Pay attention to the detail that the price is above the upper line of the channel. For aid to note it, remember the canalization process in our post “How to Use Channels to Identify Waves.” You will note that the first bullish cycle should end soon, and a corrective sequence will start nearly.
ETFs That Replicates the US Water Index
There are two ETFs that replicate the NASDAQ OMX US Water Index: PHO and CGW. The following chart shows how PHO and CGW move in sync to the US Water Index, as should be ovious.
We observe that, simply by correlation, if the US Water Index is running in the fifth wave, PHO and CGW should be travelling in their fifth wave too.
PHO – The Largest Water ETF
PHO is an ETF issued by Invesco based on the NASDAQ OMX US Water Index. Currently, Its market cap reaches $933.4MM.
The weekly chart shows five clear waves. Its last bullish move, the largest, took 499 weeks. The current scenario doesn’t a call to buy or sell PHO, although the price action remains the bullish bias, currently, it is time to wait for a corrective segment to get a better entry.
Some Conclusions about Elliott Wave Analysis
All these charts allow us to review a group of theoretical concepts already discussed in previous posts. So, we can deduce the following:
- Canalization: Channels help wave identification, easing the analysis process.
- Alternation: In diverse opportunities, we use the concept “complex corrective structure.” As you can observe in the last chart, the length of the first correction is 26 weeks, while the second corrective structure takes 99 weeks. Wave 2 is a simple corrective structure, and wave 4 is a complex corrective structure. In a future article, we will extend this concept.
- Length and time equality: Wave 3 must be at least equal to wave 1, never the shortest. But this doesn’t mean that waves 1, 3, or 5 need to take the same duration. In other words, it is likely that wave 3 holds the same price extension than wave 1, but the time needed to reach the length equality may not be the same.