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 The Daily Reckoning Australia
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