In 2011 I have discussed in two articles the potential impacts of the month of February being predominately neutral to bearish and a return to more normal markets post Australia day as the workers return. Well since I last wrote the volumes on the 28th after Australia Day were a good shot in the arm as markets fell in line with the US and as the concerns of Egypt kicked into gear so we can confirm that it's now game on for 2011.
The next challenge is the direction markets will head. Our Australian index is still trapped in its sideways move but there has been an increase in jumps to the downside and upside. Essentially an increase in volatility to markets, this could be perceived as a concern but I look at it as a sign we could be closer to resolving the directionless market in Australia to one that is up or down. The US markets after the slip down on Jan 28th have recovered to fresh highs on the Dow, S&P500 whilst the NASDAQ is holding just under its January top.
A quick scan
A quick scan around the globe shows there is divergence between the US markets and some of our Asian partners. The Indian market is high in November of 2010 and the Shanghai Exchange is trading lower when compared to its November top as well. So how can we understand this "divergence"? The US market is heading one way very strongly; we know the direction has been up. However, many of our major trading partners including Japan are slightly lower or heading lower of recent tops. The concept of one market travelling one way and other broad indicators heading in an opposite direction is called divergence in technical analysis.
There are so many indicators out there to find all in agreement or divergence would be impossible, this is where we can use statistical and seasonal analysis to build a case of what we could be looking for in the month of February. We discussed early this year that February has statically neutral with a bearish tendency when looking at the data over the last decade. If I had to make a call on where we will be at the end of February on the index (currently 4790 on the ASX 200 as I type) I would suggest below this level would be my view.
The internal rumblings
The divergence in our market and others when compared to the US could be exasperated by a correction in the US if factors like the geopolitical position or even internal rumblings kick off. Then we could see the US market give back some of its strong gains.
One major issue that I pinpoint as a catalyst is the financial position of many of the US States that are on the verge or wanting to declare bankruptcy. You can search online for a list of these States. There is current political debate on changing laws that would allow state to declare bankruptcy and this includes counties and municipalities in the US. The Municipal Bonds market is looking to be re-rated by many of the ratings agencies, and downgrades could produce the catalyst for some profit taking.
Strong buying pressure
This of course could come this week or next year as news like this is difficult to time, so we stick to our charts for a guide as to which way we should be keeping. The recent sell offs in the Aus market and the US lasted only 1 day and were followed up by strong buying pressure. This is a good test to show there is some life in the bulls. History shows that the more price shocks and volatility increases in the market we get, the closer we get to a short term top in the US market.
The test will be getting through early February unscathed. This area is traditionally the area of February that can produce some action. By early next week we hopefully will have a lead on what road the markets will take.
Do you see the ASX 200 being above 4790 or below by the end of February? (Share your views below)
Good Trading.
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