Traders have enjoyed the last few weeks in the market. There have been plenty of opportunities to exploit the strong swings to the downside and then the upside as well as huge increases in daily volumes and intraday volatility. The investor, on the other hand, has been waiting nervously for markets to stabilise. Standard and Poor’s credit downgrade for the US has been hotly debated and there were varying opinions as to whether this was responsible for the ensuing market volatility.
The markets live and die by that invisible factor called ‘confidence’. In good times, confidence is infectious but it is an even more ferocious beast in bad times and can generate panic. Now that price action has returned to roughly the same levels that were in play prior to the downgrade, we might consider whether the downgrade actually provided a jump-start to the markets. The falls from April into June were also quite large but as they occurred over months rather than days, perhaps the weary investor paid them less heed. Chart 1 below shows how the market ran 150% of the first move down, in what could be described as an expanding range and a second section to the downside.
The support that arrived in the market showed there is perceived value at appropriate levels, despite the softness in the economy and its underlying returns. So, as we return to relatively normal trading conditions, let’s consider what’s coming next. It’s impossible to say what the next round of bad news might be, but the list of potential problems is pretty long. U.S. and European woes remain and I consider Europe the greater concern. There are signs of a global slowdown, which could affect Australia’s heavily-exposed resource sectors if the contraction flows through to Asia.
Having an exposure to Asia rather than Europe is certainly preferable but if Asia goes into freefall, Australia will cop the thick end of the stick. At this stage however, growth in China and India remain firm and show no signs of recession. To my trading eyes, the low on August 9th shows great technical strength with price and time support. The pattern since the 9th is really just higher highs and higher lows and the volumes in the cash and futures markets have been above average. All of this points to higher prices in the short-term.
The next hurdles for further upward moves are the levels of support or resistance marked in chart 2 below. The 50% retracement level from the 2011 high to the recent low suggests that 4,370 (approx) will be a key level for our market. We can expect some retracements in days to come as the current up-move takes a breath and it will be interesting to see what support in volume and price comes in as the next higher swing bottom is formed and if the market can crack the 4,370 level.
Even if we can navigate to waters to above 4,370, we still have the string resistance at the 5,000 level.
Earlier in this piece, I suggested we had seen a ‘second section to the downside’. The concept of ‘sections’ deals with typical market waves or movements and to complete a trend, technical traders will often look for three sections to also complete. We have already seen two and, following this latest rally, we could see another section down for the remainder of the year. This may not descend to fresh lows but could well retest the 9 August levels.
All in all, the year ahead looks bright for well-informed, self-directed traders and investors with a plan to tackle market gyrations. For others, challenges await.
Good Trading
Aaron Lynch
