S&P/ASX 200 Clears Resistance Line

Reddit

The S&P/ASX200 continues to rise.

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.

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

Gabriel Andre
A former Futures and FX trader/portfolio manager, Gabriel Andre has worked in several hedge funds and asset management firms, both in Europe and Australia. He is a contributing editor to both Diggers & Drillers and the Australian Small Cap Investigator.
Reddit

Leave a Reply

12 Comments on "S&P/ASX 200 Clears Resistance Line"

Notify of
avatar
Sort by:   newest | oldest | most voted
Pete
Guest

Sorry, I don’t get it.

So if the ASX200 is made up of the top 200 ASX companies, how do you break these barriers and support levels and whatnot and leave the way open to 5000?

I mean, so all of the investors in all of these 200 companies will bullishly buy up stocks indiscriminately to reach this magic number?
It just seems a bit far fetched.

(However, it wouldn’t surprise me if the stock market does get that high)

rag
Guest
what a waste of space this ‘technical’ analysis is – a couple of touches at a line year ago and it is considered significant resistance – to think this analysis can call itself when any fool can draw a line anywhere as long as two points met and call it a trend line, support, resistence. As a proprietary trader the only thing technical analysis has to offer from harsh experience are the money management rules – the market may go up for no reason related to a break of a resistence line, sheer coincidence….such lame analysis but then to be… Read more »
Greg Atkinson
Guest

Not long ago the same trader was saying the market would head towards 3000. He has followed the trend down and been gloomy, and now followed the trend up and is bullish. How is that being “technical”? But wait..you can can sign up to a 60 day free trial… and I thought it was just a long winded advertisement ;)

Gabriel
Guest

@ Greg
“How is that being “technical”?”

What are you talking about ?
I have been indicating for the last 4 months that the technical resistance at 4,550 points was likely to hold therefore to trigger a correction. I was wrong.
The resistance did not hold and has been cleared. Therefore the price action should remain bullish. These are basics of technical analysis.

Another question ? ;-)

Biker Pete, Brighton, Ont., Canada
Guest
Biker Pete, Brighton, Ont., Canada

Hard to know, Greg. We predicted pretty much the same… ie., a fall to 3300… and acted on it…. made money… and bailed again around 3800. Watching the market rise, steadily, we’ve been surprised, too. What is _really_ surprising is that DRA would actually promote a trader predicting a _further_ 6.4% rise…! ;)

Ned S
Guest

Henry tax review – In case you haven’t seen it yet, the following sounds quite authorative and comprehensive – As an initial taster. But I can’t see any official version???

http://www.smh.com.au/business/my-tax-rules-the-ken-henry-way-20090918-fvan.html

Biker Pete, Brighton, Ont., Canada
Guest
Biker Pete, Brighton, Ont., Canada

Interesting stuff, Ned. Thanks for that…! Can’t be retrospective, of course, but if any of those predictions is accurate, we’ll be amending our three, five and seven year plans… :) Greg, re Canadian loans for property, our realtor has advised that it’s possible to get loans of up to 95%-100% of the valuation, from 2.6%; or five years fixed at 4.29%. Both rates seem interesting to us. It means that Canadian lenders are predicting very low rates until at least 2014… .

Greg Atkinson
Guest

Biker Pete, well as you know I stayed with stocks and stuck with the view that the market would come back up again. I think we will get back to the pre-Lehman brothers level fairly easily (4800-5000) but after that it might get a little tough for a while. At the risk of people throwing stones at me let me say that some time down the track we will even see 6500 again. Oh and thanks for the loan info from Canada.

Ned S
Guest
Cheers Biker – We are moving towards being a very highly taxed country and quite socialist. No surprises there I guess. And it might even work out OK – Quite a few of the most civilised European countries seem to be happy enough with that state of affairs I gather? Although none of them are movers and shakers in the world economy. I’ve come to like Roubini’s stuff – He’s a grumpy bear who is smart enough to know that central bankers and politicians are quite limitted; But still mainstream enough that his writings reflect what they will do –… Read more »
Biker Pete, Brighton, Ont., Canada
Guest
Biker Pete, Brighton, Ont., Canada

“…the majority could quite sensibly accept the game is unwinnable and choose to participate in only the most marginal of possible ways…” Ned, 19/09/09 Yes, that’s predictable if they get it wrong. There’s possibly also the spectre of movement of capital out of Australia, Ned. While Oz is a great place to live, with many advantages (brilliant weather for a start) if its taxes become punitive, some of us may emigrate… . ;)

Greg Atkinson
Guest

I suspect we are just moving through the same old political cycle as always. Financial crisis – banker bashing – government intervention – spending & debt – higher taxes – public outcry – new government – everyone loves bankers again ;)

The question is, how much long term damage will governments do to their economies?

Biker Pete, Brighton, Ont., Canada
Guest
Biker Pete, Brighton, Ont., Canada

“I can think of no sport that is the peer of escape”, Major Pat Reid, MBE, MC

wpDiscuz
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au