S&P/ASX 200 Clears Resistance Line

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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.
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Comments

  1. 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)

    Reply
  2. 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 contradictory – I belive in Elliott Wave theory, also that money supply can predict FX movements and there are aliens amoungst us

    Reply
  3. 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 ;)

    Reply
  4. @ 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 ? ;-)

    Reply
  5. 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…! ;)

    Biker Pete, Brighton, Ont., Canada
    September 19, 2009
    Reply
  6. 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

    Reply
  7. 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… .

    Biker Pete, Brighton, Ont., Canada
    September 19, 2009
    Reply
  8. 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.

    Reply
  9. 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 – Rather than rant about what they should do. (Which is a theme that popped up on DR recently.) With high tax being inevitable. Except in the US maybe? That mob remains a law unto themselves:
    http://www.theglobeandmail.com/news/opinions/desperately-seeking-an-exit-strategy/article1288905/

    The challenge in a high tax socialist system is to keep people interested in working I guess. Ken Henry is obviously very much aware of that. Raise the pension age and be “supportive” of workplace participation through a range of other means.

    More societal change ahead for Oz – Interesting to see the comments of others regarding things like freedom. And democracy. And capitalism. I’d throw in stability – Which DR mentioned recently. To me that is the biggest long term risk now – Unless policy makers can convince people their money (and I do mean “their” as opposed to “our”) and financial systems are stable, the majority could quite sensibly accept the game is unwinnable and choose to participate in only the most marginal of possible ways.

    Of course Oz is a really good country in many, many ways (comparatively), so migrants will continue to flock here. Which is a point I possibly disagree with Dan on? Where he says “People just want to be comfortable”; It is my thought that by and large “people want to be better off”?

    Reply
  10. “…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… . ;)

    Biker Pete, Brighton, Ont., Canada
    September 19, 2009
    Reply
  11. 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?

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

    Biker Pete, Brighton, Ont., Canada
    September 20, 2009
    Reply

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