Groundhog Year

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It feels like déjà vu.

On the 15th of April 2010 the ASX 200 peaked at 5025 and then proceeded to fall off a cliff, bottoming out at 4175 on the 21st of May, just over a month later.

That was a fall of 17% in a little over a month.

As I look at the market today I can see similar warning signs flashing.

ASX 200 daily chart

Have a look at this chart of the ASX 200.

See any similarities to last year?

Our market has rallied hard in the month leading up to April and has just had a slight false break of the previous high. The 4900–5000 region has yet again proven to be very stiff resistance.

Look at the chart again and you can see that whenever our market has fallen back under the 4850 region (the blue arrows) we have seen a sharp selloff to 4500 or below.

There are many headwinds on the horizon that could be the catalyst for another selloff.

China has just raised its Reserve Requirement Ratio for its banks again. It has also said it will continue to tighten monetary conditions until inflation is under control.

China’s property market is going to struggle under the weight of continued tightening. And we all know its resource demand relies on a strong property market. I am of the view that the Chinese property market is in just as much of a bubble as Australia. If the Chinese property bubble bursts then Australia will follow closely behind.

Greek 2-year government bond yields just hit 18.5%! Germany is floating the idea of debt restructuring for Greece. And Spain continues to live in denial that it can survive without a bailout.

We are now only a few months from the end of QE2. Noises out of the Fed are that there will not be a QE3. But it also never said that QE2 had to end at the end of June. If the money printing stops you can expect to see the markets deflate.

The big question is whether current growth is on a sustainable footing. With fiscal and monetary stimulus fading towards the end of the year we are faced with the real prospect that the growth that has been caused by massive government intervention shows itself to be an illusion.

When I look at the market in this way I have to say that the similarities between this April and last April becomes quite striking.

The rally over the past month is really due to the Yen carry trade. When the central banks of the world declared that they would stop the Yen from appreciating further it made the Yen carry trade a low-risk bet. Traders could borrow in the Yen and know that their currency risk was backstopped by the central banks. This caused a flood of money to enter world markets that resulted in the ASX 200 bouncing 11% in three weeks.

Amazing.

But the question has to be asked: is a rally based on a technical factor such as this a true rally? I don’t think so. And I have put together a free market update video for you showing why I think that is the case. I will be doing a free market update covering various world markets on a weekly basis so be sure to subscribe if you want to be kept up to date. Just click on the picture below to see the video I uploaded on Friday.

I think the price action this week will let us know whether we are going to see a repeat of last year. If you are considering buying on any pullback all I can say is that you should be patient. We may be in for a rough ride over the next few weeks.

Murray Dawes
For The Daily Reckoning Australia

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Murray Dawes
Murray began his career on the Sydney Futures Exchange trading floor in 1993 with Swiss Banking Corporation (SBC). He spent a couple of years in the 3 and 10 year bond and option pits before moving on to the Share Price Index (SPI) futures and options pit. From there he became a broker with SBC specialising in SPI futures and options to institutional clients. After leaving SBC Murray continued his career in broking at Bankers Trust Australia. Then in 2001 Murray moved to Melbourne to work as a hedge fund trader for one of Australia’s wealthiest families. In 2003 he was ready to set up his own firm providing the same proprietary technical trading system to some of Australia’s boutique hedge funds. The success of Murray’s system led to him trading a $10 million account for a high net worth individual. This involved trading Australian and US futures and Australian stocks. Now Murray heads up the technical analysis desk for us passing on to readers some of his experience from 16 years of trading.
Murray Dawes

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Comments

  1. US equities and oil down on S&P downgrade with UST’s up and Euro down big but AUD down only small ….. that’s different!

    Reply
  2. Feels more like late 2008 to me rather than early 2010 Murray. Re Oz housing anyway. With that having potentially more effect on Oz than lots of other stuff – We’ll see as they say eh?

    Reply

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