The Australian equity markets have bounced hard off the back of surging global markets. But the European and U.S. debt woes are far from resolved, leading to a serious lack of investor confidence in the current environment. The news from Europe post mid-year was followed by a strong sell-off in most asset classes as the US dollar surged and commodities fell. All in all, this seems like a case of markets being nervous and overshooting fair values.
We've since seen commodities-backed currencies like the Aussie (and to a lesser extent the Canadian) dollar climb back to more understandable levels. And, following the market's 8% rise in recent weeks, who can do some heavy lifting for the market and support these new levels? Chart 1 indicates volume levels on the ASX 200 were relatively low last week and there was certainly a degree of short covering, so the market needs increased volumes from areas other than speculators to go higher. The professional community needs to jump in and the large amount of cash retail investors are sitting on needs to be injected for these levels to increase. But have they seen enough to confidently return? (More from Aaron Lynch: Golden Times?)
We may have reached a point where the fear of being in the markets is greater than being out of it. When this occurs, as it has many times in the past following volatile periods, many people get so fed up with the antics of the market they seek relative peace in cash or other investment assets classes, like property. I am no expert on property but it already seems that interest in this sector is growing again as people chase 'easier' returns. This is a concern in itself as many property experts are having 'a-bob-each-way' on the direction of bricks and mortar, but I digress…
The fundamental concerns are still very real so this rally is likely to come under pressure in the near future. Without serious volumes to back the buying side, we could give these gains back (and more) when the market digests the next price shock or debt downgrade news from around the globe. A lack of conviction is driving current volatility and the effect is amplified with fewer players and by wild swings.
Since the double bottom pattern was formed on 4 October, there has been some higher bottom signals to go long on many stocks in the ASX 50. Many of these have had false starts where traders entering and exiting based on swings may have been stopped out - MQG and WPL are examples. Investors and traders in long the market from early October are concerned current trading levels may not represent value for opening fresh positions and are looking to others to continue the lift higher.
As at lunchtime on 17 October, volumes are limited, even after a strong lead from overseas for today's session. So how can traders avoid these volatile periods when the market is deciding which way to go? One method is to change your analysis to a higher time-frame (e.g. from daily to weekly). Trader using swing charts could change the periods to a 2-day swing chart, which would remove some of the 'noise', allowing more patient decisions. The downside of this strategy is that a move can be over by time your signal arrives. There's always a balance of risk versus reward. (More from Aaron Lynch: The Required Jump Start?)
This week's trading session begins with an undeniable bias is to the upside and while this is likely in the short-term, 'others' will need to dive in and boost the confidence of all market participants that this move is real and not a mirage. Tops around 4,350 still hold as resistance and until we break these levels on solid volumes I think another leg down (to levels where the market can be assured of good value and overseas debt woes have been addressed) is a real possibility.
Good Trading
Aaron Lynch
