Sunday, 5 June 2011

A fresh look at the ASX 200

Anyone who has followed my posts about the ASX 200 will know that it is in a down trend at daily chart level, and is seemingly on the cusp of entering a down trend at weekly chart level.

On Thursday I noticed that many of the Australian mainstream media news websites were leading with headlines similar to "Aussie Stocks Have Biggest Fall For Year". Not just leading the finance sections of their sites, but their entire news sites.

Any time a particular financial market reaches top story status in the mainstream media, alarm bells ring in my head. Those alarm bells ring loudest if I am short that market and the stories are bearish, or if I am long and the stories are bullish.

Why? Because sentiment moves markets, and news headlines reflect sentiment. Any time sentiment is strong enough toward a market that mainstream media thinks it important to lead their publication with news about that market, I think that sentiment is very likely reaching an extreme, and is therefore close to turning back toward the opposite extreme. By its nature, sentiment cycles endlessly from one extreme, to the other.

It is important that analysts and traders don't become welded on to a view of the market. The market is always providing new information to indicate likely future direction. Unfortunately, it is human nature that once a person has a bias toward a market, they are likely to see/notice/acknowledge only the news that supports their point of view.

I will now take a fresh look at the ASX 200, to see if it is telling me anything I haven't noticed before. I'll start with looking through a telescope and end with looking through a microscope. First the weekly candlestick chart, then the daily, and finally the hourly.

Due to my bearish stance at daily chart level, I have been excited to look at the weekly chart and see the ASX 200 testing the up trend line formed from the 2009 lows. Now, taking a fresh look, I can see that the market is still within the trend channel that has contained market action for the past year. This is useful new information, new to me at least. It means that there is still a chance of a bounce, so be watchful for that. The other side of the coin is of course that a break below the trend channel would add confidence to the bearish view. Technical analysis doesn't allow us to forecast markets, but it does allow us to manage risk.

The daily chart shows that the channel I identified on the weekly chart as containing market action for the past year, is perhaps part of a broader channel that has contained action for two years. It also shows more detail of the recent down trend, and shows it to be very choppy, likely corrective, rather than impulsive. If the move is indeed corrective, that would imply an impending impulsive move above 5000. 

The hourly chart shows the action for the past month. Note that momentum (RSI) is diverging (upwards) from market direction (downwards), which can be a leading indicator of a change in market direction, as it was on May 24 & 25.  That said, the market could continue to trend lower, in fact the strongest market moves in the direction of an existing trend often happen after such divergences appear, and those strong moves blow the divergences away. Do not underestimate this latter potential.

What have I learned? The hourly chart is warning of a bounce. The trend channels on the daily and weekly support the potential of a bounce. I think we are at a key inflection point. Either a bounce will begin early this week that will lead to a strong impulsive move over 5000 in coming months, or the recent down trend will accelerate. 

The market will show its hand early this coming week, and so long as we keep our eyes open, we should be able to position ourselves on the right side of the coming move.