Wednesday, 3 October 2012

ASX 200 Cup and Handle breakout would target 4950

Here's another way of looking at the ASX 200. It has formed a Cup and Handle pattern. A break higher would  target 4950. This 4950 target coincides quite nicely with the next level of resistance on the weekly chart eg. this one posted yesterday with resistance not labelled but clear at 5000ish. If you look closely, you can see that the Handle labelled on the chart is itself a Cup and Handle pattern, which has already broken out, with a target of around 4600, increasing the chances of the larger pattern completing bullishly.

At what point would this pattern break down and fail? To my eyes, a move below the bottom of the Handle on the smaller Cup and Handle pattern, so below last week's low in the 4330s. If the market breaches that level, the push to 4450 will likely have been a(nother) bull trap.

Avid Investor model portfolio adds SFR

Three things before I get to SFR.

First, a name tweak for the model portfolio, now called Avid Investor. I have done this to signal that I consider it an investment portfolio. Right now I don't have time to create and document an Avid Trader model portfolio to sit alongside Avid Investor, but perhaps one day. 

Second, I have posted the model portfolio rules in the Avid Investor rules page linked in the sidebar. Please read the rules and see that money management, primitive as it may in the case of this simple model portfolio, is the main focus, foremost minimising losses. Though over time you'll see that letting winners run is even more important. 

Third, clearly the ASX 200 is sitting just below a level (4450) that has acted as both support and resistance many times over the past three years, which suggests it has potential act as resistance again now, thus springing a bull trap. Nobody knows whether the ASX 200 will break through 4450. Is this not an insane time to be going long? Should I not be looking short? Or at least waiting for an upwards breakout before going long? In my first post on the model portfolio earlier this week I explained why I think it is time to go long. I am comfortable with the level of risk the model portfolio is taking. Nobody can predict the future. Trading is mostly about defining and accepting risk, and taking a position.

SFR Sandfire Resources was added to the portfolio today, shortly after the open, at 8.65.  

The portfolio is now risking a total of 4% of capital. The maximum allowed under rule 4 is 5% until such time as the ASX 200 closes over 4450 and thus shows an up trend on the weekly chart, with up trend being defined in the simplest and classic way, being higher highs and higher lows. At that time total risk can be increased to 10%. 4450 is the key level on the chart, but my instincts says wait for a close over 4500 before becoming more aggressive.

Trade entered due to stock hitting new highs after a long period of consolidation. Weekly chart shows breakout a couple of weeks ago, then a retest last week, which has been followed by a rally this week. Retest may not yet be complete, so need to allow further room to move.
Stop loss set at 7.76 (illustrated with short horizontal line), immediately below the low of the candle that launched the breakout.
Risk to portfolio 0.56%

Updated portfolio summary is shown below.

This post is not trading or investment advice. Please read full disclaimer.