Only the very brave would think of trying to trade against the trend. Even if your natural inclination is to be bearish on the Australian stock market you should suspend these thoughts for now.

I will explain now, why the technical indicators are pointing towards a higher move for the market.

And why this higher move could see the Australian index add another 6.4%.

The S&P/ASX 200 cleared an important technical level last week. This level was the resistance line set around 4,530 points.

Let me take you through what happened...

The first breakout occurred last Thursday when the index closed at 4,570.80 points. After another positive session last Friday the index corrected on Monday before moving sharply higher yesterday.

This is a typical sequence after a breakout. Let me explain in details. Typically, when a resistance line has been cleared, it immediately becomes the new support line for the price action.

A breakout is a clear positive signal.

This is especially valid when the resistance was in place for a long time. It means the breakout is a significant trading event and that the strength of the bullish signal triggered is high.

The second observation is that the previous resistance is generally tested just after the breakout. If validated (therefore if the price action finds support on the previous resistance), it gives confirmation to the market players that the bullish signal is solid. In this scenario, the set-up is ready for a further upside move.

This is what happened here.

The pull-back last Monday was a move that tested the previous resistance identified now as the new support. That's why the index closed at 4,531.10 points and 4,540 points on Tuesday. Lower points were posted during intraday sessions at 4,518 (Monday) and 4,526 points (Tuesday).

However, most traders usually pay most attention to the closing prices rather than intra-day price points.

As the new support has been validated, this gave a confirmation to the bulls that some further momentum is ahead. As a result, the index soared yesterday and closed at 4,650 points. This morning it is currently trading around 4,695 points.

And as the title of this analysis suggests, it looks set to head higher.

In fact, the road to 5,000 points is now open.

Click to enlarge

Why 5,000 points? Well, first and foremost, it's obviously a clear round psychological level that is an easily identifiable target.
Second, it corresponds to the 50% Fibonacci retracement ratio of the decline occurred between points A and B.

If you are not totally familiar with this powerful technical indicator, it detects and identifies support and resistance levels when a price action retraces a previous trend.

In other words, after a significant move (either up or down), prices will often rebound and retrace a significant portion (if not all) of the original move. As the price retraces, support and resistance levels will often occur at or near the Fibonacci Retracement levels.

The target of 5,000 points corresponds to the 50% retracement ratio of the downtrend started in November 2007 (point A) and March 2009 (point B). Therefore the 50% ratio corresponds to half the distance between those two points.

This represents a potential strong resistance level for the rising price action.

The 50-day Momentum indicator is heading north, whereas the Relative Strength Index (14-day RSI) does not yet detect any obvious overbought configuration. Consequently, the medium-term objective is clearly the level of 5,000 points. On the downside, the immediate support around 4,530 points remains of course valid.

At the moment, the bulls are winning the battle. It may not last, but the safer bet is to run with the bulls rather than against them...

For now!

Gabriel Andre
Slipstream Trader

for The Daily Reckoning Australia

PS. My new trading alert service, Slipstream Trader, has just gone live. To find out how you can make "slipstream" gains from mainstream stocks - and to take a risk-free 60-day trial of my new service, click here

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If you watched the coverage of the Tour de France in July, you would've seen how important tactics within a cycling race are to the overall result. What many casual observers of cycling may not realise is how important your actual physical place in the peloton (the large group of cyclists) can be to your overall performance. Where you locate yourself determines how much work you do and, more importantly, whether you are in the right place to make or follow a winning "move."

Let me give you an example. Stage three of the Tour was a relatively flat 196 kilometre jaunt from Marseille to La Grand Motte. It's not the sort of terrain in which you'd expect a strong cyclist to try and make a winning move. Normally, these flat stages are controlled by the teams of the sprinters and all the riders arrive at the finish with more or less the same time.

But just 34k from the finish of this stage something strange happened. The riders had been buffeted by winds all day coming off the Mediterranean coast of south east France. Riding in the wind is hard work. Studies show that if you merely ride behind the rider in front of you, you will end up doing around 30% less work! Why?

Strategy and Tactics Combined

When you ride in a "slipstream", the rider in front of you encounters all the resistance and friction of the wind. If you get into his "slipstream" you avoid the wind. The less work you do riding in the "slipstream" the more energy you have later when you pick the right time to make an attacking move. Riding in the slipstream is a good strategy. Making the right "move" is the tactical aspect.

Near the end of stage three, the riders encountered a stiff cross wind. Since the wind was coming from the side and not directly head on, the riders formed an "echelon." This meant that instead of riding directly behind one another, the riders rode slightly to the right of the rider ahead of them, with the lead rider on the far left-hand side of the road and the rest trailing off to the right hand side of the road.

This is when the team at the head of the pack played a surprising tactic. It found itself in a good position to make a "move." It dove into the gutter!

That is, instead of riding on the left hand side of the road and allowing the rest of the field to ride in its slipstream, the lead team all moved to the right side of the road. This forced each of the trailing riders to move further in the right, which in this case turned out to be about four feet off the road in the dirt.

The result was that the echelon was broken and a small-group of 28 riders broke into the lead on their own. Once the "slipstream" was broken, it was impossible for the riders behind-slammed by the cross-wind-to catch up with riders in front. They worked just as hard. But by the end of the day, they had lost 41 valuable seconds-all from being in the wrong place!

Trading Profits Come From Being in the Right Place to Make a Move at the Right Time

What does all this have to do with trading the markets? Quite a bit, actually. To begin with, the goal is the same. To win! In cycling, it's a race. In investing or trading, it's to build a long-term portfolio of good stocks or profitable winners.

Whatever the climate on the financial markets, whatever the outlook and the current trends, there are stocks that you want to hold in your portfolio. You may want to own them because you think that over the long-term, they will be winning investments.

The question-especially in markets that lack a clear direction-is when should you make your move to enter a blue chip stock? Or, conversely, how do you know when it's right time to exit a stock you like, but which has been disappointing you and about which you are not certain?

Timing Your Entry into Long-Term Blue Chip Holdings

Buying and holding a particular stock over years does not mean being passive on the markets. Many investors would love to be able to determine exit and entry points on stocks that they want to hold. It means that instead of buying and staring at your screen without any action, you take advantage of the trends that constitute a price development and offer you highly favourable entry and exit prices.

This means, for example, being able to exit the stock when an uptrend has completed, when the stock is clearly overbought or when a chartist pattern suggests a trend reversal. Why would you exit it? In order to buy it back lower and then lower your initial entry average price. It's a stock you want to own. But if you can use a chart to help you but it cheaper with better timing, why wouldn't you?

Let's take an example with the chart below from BHP Billiton (ASX:BHP). And let's assume two different investors, happy owners of BHP stocks bought at $12 in 2004. The first one wants to remain "long" BHP over the long-term. He bought them and he wants to hold them without any action. The other one also wants hold BHP over the long-term, but is worried about corrections and interested in the idea of profitably trading any identifiable trends in the stock's history.

Does the chart help the trader? From 2004 to 2007, it was an easy, quiet and profitable investment as the stock rose from $12 to $47 (October 2007). Buying and holding was sensible. However the last two years have been stressful and bearish.

However, there were clear signals that could have been very useful for this investor willing to take advantage of sharp moves. If he was willing to trade the stock rather than simply to buy and hold, profits were there for the taking (provided he timed his moves correctly).

In other words, a successful strategy could have been to sell BHP when the bullish trend was exhausting itself before buying in back it later, on lower levels. Not all investors may want to do this. But my aim today is merely to show you that it IS possible.

I'll show your more in a moment how to use charts and technical analysis to time your moves. But let me be clear that market timing is not about doing short-term in-and-outs on stocks that you don't care about. That's fine. But that's speculation. Market timing is about making additional gains from stocks that you want to keep in your portfolio for the long haul.

A timing service that combines chart patterns with basic technical analysis (and some discretionary judgment) may help you limit your downside risk in blue chip stocks while making gains from regular trading patterns possible. It also turns a problem into an opportunity.

This tactic of putting yourself in the right place to make a profitable move is not available to most institutional fund managers. A fund manager whose strategy is to be "long-only" knows that he will have to face negative monthly returns. He cannot sell.

Most of the time, his job is to deliver a better performance than the benchmark of reference, typically a stock index. Even though he can't short-sell, he can add some value (returns) to his fund by using market timing to reduce the exposure of the fund during bear markets, while being fully invested during bull markets. Market timing is indeed essential to lower volatility and increase returns through risk exposure modification. It sounds complicated, but it really comes down to riding in the stock's slipstream and timing your move, whether it is bullish or bearish.

Retail investors are less familiar with this as they don't have time or the tools to manage their portfolio efficiently. They usually don't manage their portfolio very actively. For instance, you may reckon that you want to hold BHP over the long-term as it should take advantage of the commodities boom. But with a little analysis from the charts and the technicals, you can ride in the stock's slipstream and could have avoided a significant part of the plunge occurred last year when the stock fell from $50 to $20 in six months.

Blue Chip Trading

In a normal market, you would not think of trading the blue chips. But this is not a normal market. Some stocks are up. Some are down. But there is no real underlying trend that gives you confidence about the general direction of stocks.

That's why using some tools to put you in the right place to profit from moves in blue chips can be surprisingly profitable (I hope). The idea is very simple: in a volatile market, buffeted by uncertainty, being in the right place to make your move can boost your investment returns AND save you from losses.

I believe "Slipstream" trading (as I call it), based on accurate trading patterns and technical indicators, can help you make surprising large profits in a short period of time off a blue chip. And this is on both the long and short side! Trading opportunities can be identified on stocks that you don't consider as long-term investments.

To summarise: "Slipstream Trading" can give you portfolio optimisation and discrete trading opportunities. It's based on medium and long-term technical indications and chartist patterns, it aims to detect, trend completions, overbought/oversold configurations, support and resistance levels on blue chip stocks. Its objective is simple: identify optimal entry and exit points on the most popular Australian stocks (among the S&P/ASX 200).

"Investing Collectively" for Large Cap Profits

Above, I've emphasised the importance of market timing to your investment portfolio. Yes, it's not easy to do (some would say impossible!). But knowing when to enter and then exit stocks isn't just for speculators.

It can benefit large cap investors too - spectacularly-if you get it right. I'm not talking about telling you what to buy or how to build your portfolio. Rather a sharp bunch of indicators that provide the right entry and exit points on ASX 200 stocks that YOU want to trade.

Take the BHP Billiton (ASX:BHP) example above. I showed that - even if you want to be a long-term holder of a stock - you can still profitably trade its ups and downs over months and years.

But there's another benefit: by taking advantage of information provided by both the price and the volume actions translated into a chart, you can also pick optimal entry points into stocks you've never owned but want to buy into.

Say you're looking at Paladin Energy (ASX:PDN). You would be amazed how useless it can be to spend hours analysing the fundamentals (the financial ratios of the underlying company and the macroeconomic trends of the sector and of the global economy) when you can get all the synthetised information in a chart.

Not everyone agrees with this of course. But I do. And the chart confirms my analysis! In November last year, my scans indicated a "double bottom" in Paladin which was preceded by a decline that set in well before the October sell-off. Further analysis indicated that this was the optimal time to open a position in Paladin at $1.68. Eight months later, the stock trade above $4.73.

With Slipstream Trading, 'Safe' Stocks can be Profitable Too

If you're a forward-looking investor, the current markets throw up multiple dilemmas - is it time to start buying back the stocks you sold? Are some stocks you own still vulnerable? Is this volatility throwing up profit opportunities that are passing you by? Should you get into banking stocks now... or never?

The speculators are going ballistic. Half of them are making a killing, the other half are losing their shirts. But what should the large cap investor do when there is so much "noise" in the markets? My best answer is - if you want your ASX 200 holdings to be winning investments over time - is to trade in the 'Slipstream' of big price moves.

This is easier said than done. That's why erasing emotions during the investment/trading process is so important. It's very difficult to accept being wrong (losing trade) when you feel that your thinking was right.

To avoid this, the best answer is to track the charts, and only that. It is assumed that the market players have all the information available. Therefore the price reflects everything: the data, the fundamentals, the expectations, the emotions, the risk appetite etc. And that's why I like the 'Slipstream' metaphor.

Tracking efficiently both price and volume actions will give you the possibility to "launch" your market attacks at the propitious moment. Exactly like the cyclist I used to be in my early 20's, when I was riding up and down the hills and valleys of the Pyrenees.

An Individual Sport, Practiced Collectively

One maxim says that "cycling is an individual sport practiced collectively". It means that alone, you are nothing, whatever your skills. This is exactly the same in the financial world: you cannot possibly win if all the other competitors are against you.

And I believe this is especially the case when trading the biggest companies on the stock market - ones with market capitalisations over $800 million. Because here there are a heck of a lot of other investors trading the same stock, meaning more chances to ride in the 'Slipstream' of price moves.

See, in cycling, you have to take advantage of the peloton to be able to win a race. This means being able to identify and assess the strengths and the weaknesses of the peloton. You don't need to analyse the weather conditions, the distance or the slopes (the fundamentals) because the other racers have analysed them too. You won't make the difference here.

However, you will be able to win if you are able to analyse, understand and anticipate the behaviour (the price action) of the peloton. It is them you are racing against. If you are able to identify when you have to wait in the middle of the pack or when it's time to attack, then it means you're a potential winner.

A Question of Timing

This is exactly the same thing with stock markets. If you understand and anticipate the price action, if you know when you have to wait (hold) and you have to attack (place a trade), then you're a potential winner. It's a question of timing. Market timing. It doesn't guarantee victory, of course. But it can put you in exactly the right position to profit, time after time.

I quickly found that technical analysis for market timing purpose would be my best friend when I started my career in the investment industry. I have been using technical analysis and chartist indicators for almost ten years now. I'm absolutely certain my gruelling cycling slogs through Pan, Jurancon, Gan and Coteaux de Lasseube gave me an edge in analysing the markets. In fact I'm surprised I've not heard the analogy before, as I know many traders who are avid cyclists.

I've profitably used my 'Slipstream' timing technique both as a trader for hedge funds and as an analyst for the Swarm Trader . The key is to detect what is the priority and what is of secondary importance when you trade.

The priority is to track what the crowd does. The rumours, the news, the statistics and all other pieces of data that constantly arrive on your screens are of secondary importance. These will be translated into price development regardless of what you make of them.

If you know how to "read" what the crowd does, then you can anticipate what the crowd will do. This relies only on the analysis of the price action. Indeed, you "read" the behaviour of the crowd through indicators and chart patterns.

To summarize: If you read this information correctly, you can position yourself in a slipstream - or 'profit pocket' - of an imminent price move. Professional cyclists call it "cheating the wind". Here you could call it "cheating the market. Find the "bubble" in the price action and let the investors in front of you do all the work.

This is a remarkable way to detect perfect buying points in Australia's top 200 stocks. It can help you make great profits in a short period of time off a blue chip stock. In some cases, the kind of gains many small cap gamblers would be envious of.

Of course, we've yet to cover the most important part: how do you know when a slipstream move is forming? Below, I'll 'lift the bonnet' on my system, and give you a step-by-step look at how I integrate technical indications and chartist patterns to pick optimal trading points for ASX 200 stocks.

How Charts Can Position You in the Leading Pack

It looked like Mark Cavendish was simply going through the motions when he won Stage 10 of the Tour de France in July. He got a perfect lead-out from his Columbia-HTC squad. It propelled with great force the 24-year-old through two tight right-hand turns in the closing kilometre and safely on to the ramp of the 250m finishing straight.

Then, he exited the 'Slipstream' and his power took him away from his pursuers. Cavendish paid tribute to the way his team-mates had nursed him through three days in the Pyrenees: "I had eight guys trying to help me conserve my energy," he said. This is the whole idea behind Slipstream trading, which we've covered above.

Let the rider - or stock buyer - in front of you cope with the headwinds. If you get into his "slipstream" you do less work. The less work you do riding in the "slipstream" the more energy you have later when you pick the right time to make an attacking move. Riding in the slipstream is a good strategy. Making the right "move" is the tactical aspect.

Taking this approach can help you, as an investor in large cap Australian stocks, answer many questions you may well have found yourself asking this year: When should you buy when a stock is riding a bull trend and is constantly rising? Should you at all? How do you avoid buying on tops? When should you take profits when a stock has had a surge? How do you avoid selling on lows?

All of these questions rely on making your move at the right time.

'WHEN' Not 'WHAT'

When it comes to the ASX 200, my goal is to reveal not WHAT to buy, but WHEN to buy it. My assumption here is that you already know what stock you want to own, for whatever reason. The main issue now is to identify the best entry point.

Similarly, if you hold a stock and you have already decided to sell it (whatever the reasons that convinced you to sell), then your problem is to determine the best exit point.

Here's an important point: just as in cycling, you don't need to be in pole position in a trade to be an ultimate winner.

I love using this form of technical analysis to find entry and exit points for large cap stocks. It is unlike pure science: because you're actively PARTICIPATING in the outcome. You're not a dispassionate observer. When you take a position, you're influencing and building on a pattern so the one you pick almost becomes a self-fulfilling prophecy.

This is like cycling in a race. While riding in a pack you're participating in a co-operative effort; one that, all going to plan, leaves the next bunch of cyclists further and further behind you. Of course, you can only win by knowing when the next 'move' is about to take place.

So the big question is: How Do You Know a Move Is On?

So how do you know when to move with a price break-out, or hold back? On which elements do you base your decision?

I'm not going to attempt to turn you into a professional technical trader. For one, it would take a lot more than a long introduction like this. I'm not much of a teacher anyway. But what I do have is experience. In sharing some of this with you, I hope to at least help you make more enlightened investment decisions.

I believe that identifying and making 'Slipstream' movements is relevant to determining two important things:

1. What forces are working inside the ASX 200 at any given time
2. Where those forces might send a specific stock next

Knowing those two things can be very profitable in the long, medium - and in a small number of cases - the short term. How do you know a slipstream move is forming?

Inflection Points: Your Invitation into the Slipstream

Depending on the trading style and time frame, the tools or indicators that you use will differ, and the way you will weight them also varies. But the goal is always the same: identify the slipstream and position yourself in the right place to profit.

It's a case of putting your capital in the right place at the right time. And, if you wish, getting it out at the right time.

To be able to detect optimal entry and exit points you have to identify potential chartist inflection points. These appear through technical recognitions such as trend completions, overbought/oversold configurations, and support and resistance levels. And thanks to price indicators and volume indicators, those technical recognitions can be detected and then offer opportunities for getting in or out of the trade.

I realise I'm getting a little technical here. And, bear with me, because I'm going to get a little more technical - but I think it will be worthwhile. The point I'm making is quite simple.

Fundamental analysis might tell you WHAT stock you want to own or not own. But, in my view, only tracking and interpreting technical variables will tell you when a price 'move' is about to take place.

I use three tools to identify slipstream moves: technical variables, chart patterns and discretionary analysis.

Technical Variables

You might have heard most of the technical variables. I liken these to the equipment pro cyclists use to win races. Where the casual observer sees a bicycle, pro cyclists see a Monocoque carbon aerodynamic design, carbon Vibe handlebar, PLT stem, carbon seatpost and 5mm gel armrest pads.

It all may seem a little trivial to us. It's anything but for those who find themselves on the winner's podium. Cavendish, for instance, went wild one day during the Tour when he suddenly decided he didn't like something about his front wheel. He reached down to snatch at the quick-release, pulled the wheel off, and looked as though he might have hurled it at a mechanic if there hadn't been a few spectators around the team bus. He got the wheel he wanted, and won the stage.

Similarly, when your average chart observer simply sees a bunch of lines and bars, the professional technical analyst sees oscillators and momentum indicators such as MACD, Commodity Channel Index, Momentum Indicator, Money Flow Index, Volume Oscillators and the like.

These are the most popular indicators used on the global trading floors. Read these variables correctly, and you're in the 'Slipstream'.

Of course, simply gaining a place in the peloton (the group of cyclists) doesn't guarantee you'll win, or even be able to stay with the group. Which is where we get to...

Chart Patterns

Remember, we're talking about timing the markets here. Therefore both daily and weekly data are used. So in addition to indicators, I focus on chart patterns and line studies that regularly form. This is a mathematical way of tracking mass psychological and cycles, and the patterns they form to suggest impending price moves.

Think of these, once you're riding in the pack, as really good signs - taken from the actions of the other pack members, as well as observations of the terrain - that a 'move' is on the cards.

The patterns I look for are head and shoulders; double tops/bottoms; indecision triangles; price channels; wedge patterns; Fibonacci lines and more. Finally, and most importantly...

Use Discretionary Analysis to Make Your Move

On top of indicators and patterns, it's essential to add discretionary analysis to eliminate risky configurations that technical or model-driven systems can't detect. You can have all the tools and training in place to position you with the lead pack, but it's your 'top two inches' (your brain) that will determine whether you win or lose.

This analysis relies on one thing: experience. It's not just a question of "how" but rather a question of "know how".

In trading, it's not complicated to understand how the indicators and the mathematical stuff behind each tool. However, the main issue is to know how and when to use them and in which context. Think of this as the thought process that goes through your head before the "bunched sprint" to the finish line begins.

One indicator by itself is not sufficient to provide a solid signal. Indicators must be combined to get confirmations and to have then a high degree of accuracy. They are more or less sensitive to price action, or to volume action. Some of them perform when combined, while others are redundant and not complementary. You don't learn that in books or seminars. You learn that when you trade.

I know I haven't turned you into a 'pro-technical analyst'. But hopefully I've given you a little insight into how chart-watchers such as myself view and profit from underlying price actions. Below, I'll give you some specific examples of how I've used this 'Slipstream' timing technique to profit from large-cap ASX stocks in recent months.

How to Boost Your 'Boring' Buy and Hold Returns by 105%

"Legacy stocks" are ones you believe in - income generators and slow-growers you'd like to think you'll pass on to your kids one day. There's no harm in owning a collection of legacy stocks on the ASX. But there's no harm in maximising the returns they give you, either.

Take the BHP Billiton example I showed you earlier in the week. Remember I gave you the example of two types of traders: one who will steadfastly remain "long" on BHP. He loves the stock and will never let go. The other also likes BHP long-term, but is keen on limiting losses on corrections and profiting from rallies.

Fundamental analysis may help the first investor in picking BHP outright. But it will be much less useful to the second investor - the one who wants to track and profit from movements in the underlying price.

To do this effectively, you need to look to the charts. Interpreting technical variables and indicators will tell you where a price is trending. That's how you get into the 'Slipstream' of a price movement. One such indicator is bearish (or bullish) divergence.

Bearish and bullish divergence between price and the relative strength index (RSI) can forecast possible trend changes in a stock's movement. If you can learn how to identify these turning points, you can extrapolate where a price might be heading. A bullish divergence often foreshadows an upward movement in price. A bearish divergence indicates a downward correction. Take BHP Billiton (ASX:BHP).

Avoid the Correction, Buy Back for the Rally

In May 2008, the charts showed me a clear bearish divergence was forming. As you can see in the chart above, the price action was posting a new high (point B) at $50. The RSI was oppositely posting a lower high (point D). This breach meant that the oscillator was not backing up the rally of this stock. Therefore a trend reversal was imminent.

As soon as the RSI peaked and curved downward, it was indeed the perfect time to sell the stock. This signal was triggered the week when the stock traded between $46 and $49. Had you received this signal, you could have sold out and taken profits before the stock plunged under $25.

Following this, in October '08, a strong signal to buy back BHP occurred. This is indicated by the circle, when this same RSI posted an historical low in its oversold area (it had not happened once since 2003). Remember that this is the weekly RSI: it meant then that the stock was oversold on a weekly basis, which strengthens the reliability of the indication.

As soon as the RSI curved upward AND left the oversold area. This is a bullish signal signifying that a group of buyers was forming to push the price higher. In the last week of October 2008 a signal was triggered that it was time to join the 'Slipstream', when the stock traded around $25.

A Story of Two BHP Investors

So let's recap where our two BHP investors stood in June this year. Remember, we're assuming both investors got into BHP in 2004 at $12 when the resource boom began. One investor is using technical analysis and charts to time his exit (and later entry). The other is not. How do the two compare?

The first investor who simply buys and holds hasn't done poorly. A recent close at $34.91 means he's sitting on an unrealised gain of 191%. There was a big up and then a big down. But over the journey, he's respectably up-although he hasn't realised any profits yet. Still, not bad at all.

What about the second investor? He's the one who makes his "move" in BHP based on the language of the market and not because of a fundamental fidelity to the position. The second investor would have sold when the stock price peaked at point B in the chart, but the RSI made a higher low (point D). This was the "sell signal" that I saw flashing but would not have been on the radar of the first investor.

If the second investor sold at $47 (not the high, but after the signal was triggered) he would have realised a gross profit of 291% on the long-term trade. That's a full 100% better than the buy-and-hold investor number one. But there is more.

The second investor is not entirely neutral on BHP. He wants to own it. But his aim is minimise his exposure to price volatility while maximising the generally positive upward trend. In October of 2008, he notices the historically low RSI corresponds with a low in the share price. A buy signal is triggered at around $26.

He enters a new position in BHP at that point and using yesterday's close-in addition to his gross profit of 291% which he's already booked-he's sitting on a second but unrealised gain of 34%. He's long the stock again but he's already made money.

Both these investors are "long" BHP, a decision they made in 2004. Both still own the stock. But compared to investor one, investor number two - if you combine his realised and unrealised gains - has doubled his profits and is sitting on a new gain, while investor number one is sitting on a respectable but unrealised gain.

To be sure, I am making some assumptions with this example. I'm assuming both investors entered BHP at a low. I'm also assuming investor number two got his exit and entry signals correct. It is always easier to do this in retrospect. Doing it in real time is the test of a true trader and a good system.

I hope to bring you more examples in the future. In the meantime, the BHP trading pattern of the last year is an excellent example of how you can use technical analysis to maximise returns on your long term holdings. It's a tool you should consider adding to your investment playbook for your sprint to glory!

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Symmetrically, a decline of the AUD/USD makes gold more expensive for them. This foreign currency (FX) effect (also known by traders as currency risk) is a real matter for local investors.

FX markets in general and the Australian Dollar in particular had impressive volatility in 2008, especially during the second half of the year. If it continues in 2009, you'll want to understand the relationship in order to devise your own gold strategy.

On the chart above, the black line represents gold in Australian dollars (we called this composite "Aussie gold"), while the green bars represent the currency pair AUD/USD. There are three different phases that are distinct.

1) Phase 1 from August 2007 to March 2008 where "Aussie Gold" climbed sharply despite the fact that the AUD/USD exchange rate was rising too. It means that at the same time, gold prices in USD were rising faster than the AUD/USD.
In details, it means that, the AUD/USD ( how many US Dollars for ONE Australian Dollar) rose by 11% roughly between September 2007 and March 2008. For the same period, gold (therefore how many US Dollars for ONE ounce of Gold) rose by 31%
As a result, both the AUD and gold appreciated against the USD, but gold appreciated much faster. That's why the Aussie gold price (how many Australian Dollars for ONE ounce of gold) also climbed sharply. What does it all mean? It means that gold appreciated against AUD!
The Aussie gold price is a function of the velocity of the AUD/USD compared to the velocity of gold. If AUD/USD appreciates faster than gold, then the Aussie gold price declines. If gold appreciates faster than AUD/USD, then the Aussie gold price rises.

2) Phase 2 from March 2008 to September 2008 where the "Aussie gold" was cheaper as gold in USD was correcting while the local currency jumped to historical highs until July, then crashed.

3) Phase 3 from September until now where gold prices on the international markets are consolidating and rising again whereas the AUD/USD has been falling to low levels not seen since 2003. As a result, the "Aussie gold" is soaring.

Since last October, we can see that the Aussie gold price is reaching historic highs. Because of the crash of his currency on the FX markets, a local must pay today $1,250 AUD to buy an ounce of gold. At mid-August last year, the cost for the same ounce was only $917 AUD. It's a 36% increase in 5 months!

What is the conclusion of that?

Well, we have calculated the correlation between gold and the Australian currency, both the strength of their relationship and the degree of their relationship. From 1991 to date, this correlation is equal to 81%. Gold and the Aussie are positively correlated, as they typically move in the same direction because they are both traded against the US Dollar. But they don't move at the same pace. And this is that difference of pace or velocity that drives the Aussie gold price.

On a historical basis, a strong Australian dollar is NOT a 100% guarantee of a cheaper gold for local investors, but it is clearly often the case.

That's why if you want to buy gold, I would suggest you to wait for the Aussie gold price to correct. Currently these are the historical highs. If we have a look at the Aussie gold itself on a weekly chart (above), the MACD shows that the bullish momentum is likely to be over. It has peaked at unprecedented high levels on early January and has already started to curve downward.

Historically a similar configuration happened twice, in May 2006 and March 2008 (circled on the chart). If the MACD crosses below its signal line, it would be a clear signal of trend reversal, and would drive the Aussie Gold much cheaper. We will keep an eye on that in the coming weeks!

Gabriel Andre
for The Daily Reckoning Australia

• Prices of Gold in the Top 10 World Currencies
• The Aussie Dollar as a Measure of Global Risk Appetite
• September is the Best Month for Gold
• Aussie Dollar Ready to Storm Past US Dollar
• Price of Gold Communicates U.S. Monetary and Fiscal Policy is Lousy

Well first, you already know the Aussie Dollar has plunged against the US Dollar since mid-July. But you might be surprised to know it-s also declined against all the other currencies of the G10. This is because it is a commodity-related currency. The sell-off in the commodities market as well as the decline of the local equity markets have been part of the sharp pull-back that began in July.

The other driver has been interest rates. The RBA cut rates in September and October by a combined 125 basis points. These rate cuts decrease the upside potential of the Aussie. The currency was strong in the last few years because of the interest rate spread and of course, booming commodity prices.

First, take a look at a weekly chart below. The beginning point of the recent multi-year rally was in 2001 (point A on the chart). At this time the AUD/USD currency pair was trading around 0.51. It rose until 0.9849 in July this year. The pair nearly doubled in seven years.

The trend was so strong it overcame all resistance. The first main resistance to this long-term bullish trend was 0.80 (points B, C and D). That level became a new support level (points E and F) once it was broken through. The recent strong bearish move easily cleared this level. It has now found new support around 0.6350 (point G), which was a previous low posted in 2003 (point H).

In terms of percentages, the fall is impressive. Between the closing price of July 15th, which is the historical high price, and the closing low posted last Friday, the Aussie lost more a third of its value against the USD. It-s a decline of exactly 34.3% in less than 3 months (between points A and B on the daily chart). That is exceptionally rare on the FX markets.

As a result, the technical indicators have moved down into deeply oversold territory. However the recent (temporary?) bottom and the bounce back initiated this week argue for a further rebound.

The 14-day Relative Strength Index (RSI) has just triggered a bullish signal as it curved upward and left the oversold area by crossing above it signal line. It also shows a bullish divergence. A bullish divergence occurs when the market price is making a new low but the RSI is failing to do the same: the RSI does not confirm the new low. This divergence is an indication of an impending reversal.

This bullish divergence is confirmed by another oscillator with longer-term parameters, the 100-day Commodity Channel Index (CCI). Other indicators show that some further positive price action is likely.

In this scenario, a significant correction of the recent decline is expected. The Fibonacci retracement levels of the 3-month plunge give us the next targets for the coming rebound. The levels of 0.72 and 0.77 are consequently the objective prices as they correspond to the first two ratios (23.6% and 38.2%).

Whether the rally in the Aussie signals a new appetite for global risk taking remains to be seen. In the past five years, foreign investors have been fond of borrowing in dollars and yen to buy Australia-s currency and its commodity stocks. With the prospects of a global recession in 2009, this carry trade may not recover its previous popularity.

That should make for much more volatility in individual Aussie resource shares. These shares will now be valued on the basis of their individual prospects and the forecasts for commodity prices in general. You can expect a divergence in resource shares between those that went up strictly because of a rising market, and those that have good projects that will generate real earnings in the next year.

As always, this volatility is excellent for traders. And as chartists, we believe the fundamental value in excellent resource companies will show up on the charts too. Our momentum indicators are designed to identify these stocks once their moves begin. It won-t be the whole market. But it doesn-t have to be to still be lucrative.

Gabriel Andre
for The Daily Reckoning Australia

• An Oil Price Correction is on the Horizon, When and Where
• CRB Index Correction Likely to Go Further
• Gold, the Aussie Dollar, the Greenback and You
• Aussie Dollar is Crushing Long-time Rivals Like the Pound and the U.S. Dollar
• Profiting From the Copper Indecision

Less than one month later, the price has cleared the long-term support line on the downside (that goes through points A and B on the chart). As a result, the bearish sentiment strengthens and will probably drive the price even lower in the coming weeks. The price closed at $6,860 a tonne 2 days ago on the London Metal Exchange (LME).

Click to Enlarge

What is going on?

Copper has fallen 22 percent from the peak of $8,775 posted on June 30, as increasing stockpiles signalled weaker demand. Imports of copper and copper products by China fell 4% in August compared with July.

Another element that has an impact globally on commodities markets is the recovery of the US Dollar. Remember that despite the exchange being based in London, copper is priced in US Dollars. A rebound of the Greenback therefore reduces the dollar-priced investments.

The price had moved within a long-term indecision triangle pattern. The basis line of this triangle was the long-term support line that backs the bullish trend started in late 2003. It had been tested and validated in February and December 2007 (points A and B on the chart) where the price bounced back strongly.

The upside of the indecision triangle pattern was the resistance line that goes through the highs posted in May 2006, and in March and April this year. This resistance zone was set around $US 8,900.

The last retracement level (61.8%) of the sharp bullish trend occurred between last December and last March (between points B and D). This had been the opportunity for a small rebound (point H) but it failed to cross above the 38.2% level (point K).

Since the beginning of this month, both the 61.8% level and the long-term support have been broken on the downside. This means the negative trend still goes on.

The MACD has just triggered a new bearish signal, and the Momentum indicator and the RSI are also negatively oriented. In this bearish scenario the next important target is the level of the previous long-term low which is the low posted in December last year (point B), around $6,300.

Gabriel Andre
for The Daily Reckoning Australia

• S&P/ASX 200 Clears Resistance Line
• Macmahon Holdings Limited (ASX:MAH) Near a 52 Week High
• The Aussie Dollar as a Measure of Global Risk Appetite
• Corn Prices on the Rebound
• How to Trade Gold Shares

However prices have been falling back for roughly 6 months, and the closing price last Friday has been posted at $7.51. A good overview of the fundamentals of this volatile market is essential before analysing the technical aspects.

First, the global demand, because of the world population growth, is easily predictable. Those past few years, it has moved between 615 and 625 million tonnes per year.

On the offer side, 20% of the world production is put on the market when 80% is domestically consumed. The main producers and exporters are the US, Canada, Australia, the EU, the ex-USSR area and Argentina.

Like on the corn market that we studied recently (Money Morning of August 20), the two main drivers of the offer side are the plantations and the weather conditions.

Last year, many farmers in the US changed wheat plants to corn (at this time producing corn was more profitable thanks to the bio-fuels rising demand) and the weather conditions were really terrible worldwide (drought in Australia, heavy rains in Europe and Russia, cold wave in the US and Canada). The correlation between weather and prices on the wheat market is really strong.

As a result the global stocks decreased massively during the past year. The current level of inventories is the lowest in the last 60 years in the US, the lowest in the last 30 years globally!!

However, the recent decline of the wheat prices (-16.8% since August 21) is now explained by current economic circumstances. First the rise of the US Dollar is a brake for the non-US importers. As the wheat is sold in US Dollars, a stronger Greenback leads to higher prices for the rest of the world.

The other reason is that several exporting countries have just eased restrictions that they had decided a few months ago when the food inflation and alimentary crisis was peaking!

Of course, last but not least, the speculation on this volatile market (therefore where there are a lot of opportunities to make money) is a key factor that strengthens the trends in place.

What to expect now? Two contrarian forces are in place. On one hand the momentum and oscillator indicators are bearish. Both the MACD and the CCI (Commodity Channel Index) have triggered negative signals in late August. There are no oversold conditions therefore a further move on the downside might be possible.

Click to Enlarge

On the other hand, the price action reached last Friday an important area of support. It corresponds to both the medium-term support line (that goes through points C, D and now E) and a long-term support line that has been a previous resistance in 2003 and 2004. This level of $7.50 has indeed been a previous high; it could be now the new low.

That's why a short-term rebound is expected during the next few sessions. A retracement of half of the recent decline (therefore towards a target of $8.25) is likely.

Good Investing,

Gabriel

• Corn Prices on the Rebound
• Australian Dairy Prices Up Due to Grain Prices
• Farmers Say ‘Rain, Rain Go Away’ Throughout the United States
• Aquaculture: Soybeans and Corn Under Water
• Cattle Prices Have Risen Only 1% This Year

The stock climbed from less than $0.10 in June 2001 to $0.97 in February 2007 at a regular pace. However it really took off in early May 2007 as it was trading around $0.80, to reach twice the level of $2 a few months later, in November 2007. It's a 150% rise (between point A and point b on the chart).

Click for a larger image

The stock has corrected this large increase and has been trading since within a consolidation phase. The first retracement move drove the price until the 50% Fibonacci ratio (point C) and towards the 61.8% ratio one month later (point D). The fact that the price action eventually bounced back on this level means that the outlook is still positive on the long-term, and that new attempts to test the historical highs may be possible.

Recently, on August 13 and 19, two lows have been posted on the long- term support line (through points A, D and E). As a result, the price rebounded and should test now the long-term resistance line (through points B, F and G). The trading envelope is narrowing.

The MACD has triggered a bullish signal as it curved upward and crossed above its signal line. Other oscillators confirm this therefore a further move on the upside is likely.

An interesting complement to the MACD is the TRIX indicator. TRIX displays the percent rate-of-change of a triple exponentially smoothed moving average of the security's closing price. This triple exponential smoothing is designed to filter out "insignificant" cycles.

Here the TRIX changes direction and crosses above its signal line. It confirms the MACD indication. The stochastic oscillator is also positive but shows that extreme levels could soon be reached. The theory behind is that in an upward-trending market, prices tend to close near their high.

Therefore the level of $2, the historical high price, will be probably a strong resistance to the current bullish price action. Today the stock is trading at $1.825. A jump to $2 is a 9.6% further rise. At this level the stock would be probably overbought on the short-term so a pull-back would be expected.

The stock would need to clear this resistance and cross above $2 to get new fresh bullish momentum. On the downside, the main support line is set around $1.55.

Good Investing,

Gabriel Andre
for The Daily Reckoning Australia

• S&P/ASX 200 Clears Resistance Line
• Profiting From the Copper Indecision
• How to Trade Gold Shares
• The Aussie Dollar as a Measure of Global Risk Appetite
• An Oil Price Correction is on the Horizon, When and Where

Corn may be one of those opportunities. In our last update on corn, on July 10, we were betting that $6.50 would be the main target but that a breakdown of the 100-day moving average would give some further bearish momentum. This is what happened, as the price action posted a low at $5.04 last week. It has however already slightly rebounded. Technical indicators show that the current rebound should drive the prices higher.

Corn prices yesterday fell recently to the lowest level this year after the US Department of Agriculture revealed that farmers were able to boost the country's corn crop in spite of the damage generated earlier in the season by the worst flooding in 15 years.

The USDA forecast the 2008-09 season would see the second largest corn crop on record, triggering further selling of agriculture commodities futures. That's why the prices declined from a high of $7.99 a bushel last June to the recent low at $5.04, which is a 37%-fall. This cooled down the concerns about global food inflation.

Nevertheless, food prices are still 44 per cent higher than last year and almost double the level of 2006.

Yields and harvests were expected, thanks to new plantations in the US, to increase significantly the offer, driven by food demand and bio-fuel consumption. However price will remain sensitive to weather conditions that may affect the expected production.

Click for a larger version

Prices countertrends are then likely. Technical indicators help us to identify them.

The prices have already retraced 23.6% of the bearish trend initiated in late June (between points A and B on the chart). They should go higher. MACD has triggered a bullish signal when it crossed its above signal line, as well as the RSI that indicates that an obvious oversold configuration was reached. The price oscillator also shows that volume is building up on the short-term. Consequently a momentum is building up too on the upside.

The main target is therefore likely to be the 50% Fibonacci retracement. Indeed, it also corresponds to the 100-day moving average, around the level of $6.50. It would become a solid resistance to this rebound.

Gabriel Andre
for The Daily Reckoning Australia

• Wheat Prices Look Set for a Move Up
• Aquaculture: Soybeans and Corn Under Water
• Farmers Feel Consumers Blame Them for High Food Costs
• CRB Index Correction Likely to Go Further
• Profiting From the Copper Indecision

But our focus today is oil itself. That’s where the market is focusing. Oil’s what equity traders are looking at.

The big question: is this short term selling or a medium-term switch in trend? I mean, in early June, the oil price slipped from US$135 to US$123. Then it bounced back again.

Really, there are a lot of questions over the oil price at the moment. Does this correction mean we won’t reach the levels of $200 or even $250 that a few analysts have forecasted? Or is this a consolidation phase before renewed strength?

We can’t answer all of those for you. Some of them depend on the future. But we can definitely clarify the charts for you…and why they’re more important today than ever.

Obviously nothing has really changed on the fundamentals side. Master Card recently announced that in June US petrol purchases decreased by 3.9%. And that’s not a new trend. US crude demand has been lower all this year.

But the funny thing is, fundamentals aren’t moving the price any more – in either direction. The ebb and flow of military activity in Nigeria, for example.

Normally when militants offload a few rounds, the oil market perks up. Not today.

That doesn’t grab you? Well, US crude inventories have decreased by 6 million barrels this yea. That should have knocked oil prices up a notch.

And that is what makes this oil price move an example of trading flows. In this scenario, anything can happen. Speculation-driven moves are basically volatile, unpredictable, often wild, and without any apparent logic.

Except the logic of making profit of course! That’s why the technical analysis is more helpful than usual here. It maps out the playing field through the eyes of a trader. You can see what the pros see. So hurry up and take a look.

The first support traders will look at is around $121/122. That’s the first target.

The key moment in oil was when the price action crossed below that medium-term support line. It has been tested and validated several times (points A, B, C and D). The rally drove the prices from $85 to $148, a rise of 74% in 5 months and a half only. It’s perfectly understandable now that oil should fall just as quickly.

So we’re still about seven or eight bucks away from the part where the market finds strength. The other supports are around $111, $98, with a monster at $83. If support at $121 falls, we’ll let you know more about the others. That’s how oil is shaping up.

[Please note: neither the authors nor any of the employees of Port Phillip Publishing own shares in any of the stocks discussed in Money Morning. The articles do not give trading or personal investment advice, but are intended to provide a useful, independent news and analysis service to supplement your own investing and trading. Consult your financial advisor before making any investment decisions.]

Gabriel Andre
for The Daily Reckoning Australia

• S&P/ASX 200 Clears Resistance Line
• An Oil Price Correction is on the Horizon, When and Where
• Crude Oil Could Hit $200/Barrel
• How to Trade Gold Shares
• Crude Oil Extends its Price Decline

An oil shock is undoubtedly here. It may turn out to be "the" oil shock, or it may not. Either way there's a lot you have to take in as an energy investor. Oil is breaking new ground each time it gains. We haven't been here before. Not many analysts understand exactly what is going on.

However, the laws of supply and demand still apply. There are still buyers and sellers. Read on for a clearer view of what you're dealing with. Now may not be the time to go chasing high-priced oil companies, an oil price correction could be on the horizon.

The trend is your friend until it ends.

There could not be a more important maxim of technical analysis. We don't know who said it first, but they were right. Every trend eventually ends. Every bull market corrects.

We're not looking for the end of the overall trend here, but a price consolidation. A minor trend that goes against the major one. Where does this current price explosion cease? And where will the minor trend take us?

In other words, when will oil consolidate, and by how much?

If a broker's report could tell you that, I'd be out of a job. Thankfully, there are some issues that fundamental analysis is hazy on. The chart should provide a bit of wisdom here.

There are three pretty well-defined points of support for oil. Each was established by a previous high. You'll note the long-term support level of US$83 stretches all the way back to 2005. It's the most well-tested, and the strongest buying point if oil comes back that far.

The other two are fair buying targets, although not as bullish as US$83. A level of support at US$110 will be the first place that traders move back into the market. If they get run over by sellers there, watch for a rally at US$98.

As for the when? Well, the answer is: any time now. There has been a common misunderstanding that the oil price should have corrected a long time ago, at US$110 for example. We can't help but disagree. Only now are the technical indicators finally beginning to show some cracks in the trend.

Firstly, oscillators indicate that oil has sailed into overbought waters. The MACD on the chart above is at an all-time high. Watch for it to turn around. That would confirm a turnaround of sentiment in oil.

But here's a little industry secret...traders won't be selling until the MACD line moves below zero. Such a movement tells them that the short-term average has dropped below the long-term average for oil's price. That's the selling signal sellers are waiting for.

We rarely settle for a single indicator though. The MACD gives us a taste of what's yet to come, but we're not full yet.

That brings us to the Ultimate Oscillator. This vital chart, second from the bottom, has often been a great relief to many oscillator traders. It smoothes out the volatility in other oscillating indicators, leaving you with a raw signal that can't be ignored. It tells when other prices indicators are lying.

Consider the bullish trend started in end of March until now. Oil prices recently posted a higher high (on May 21 above $134). But today there's a bearish divergence in the Ultimate. This divergence argues for a coming retracement. It overrides other methods.

Not enough for you? Well, the RSI and Stochastic oscillators also indicate that the prices are overbought.

Broadly speaking, a lot of bearish signals are flashing...or soon will be. The market is truly ready for a healthy oil price correction. You know where the buying points are. Now it's just a matter of time before the correction takes place.

Gabriel Andre
for The Daily Reckoning Australia

• How to Trade Gold Shares
• Profiting From the Copper Indecision
• Macmahon Holdings Limited (ASX:MAH) Near a 52 Week High
• CRB Index Correction Likely to Go Further
• The Aussie Dollar as a Measure of Global Risk Appetite