Up 80 points one day…down a similar amount the next. You probably don’t need me to tell you that volatility abounds in the stock market. And that’s before we consider the start of this year, when the ASX endured one of its worst starts on record.
The ASX has become something of a ‘trading’ market. Price moves are based on the order flow — traders trying to pick short term tops and bottoms — rather than trading on underlying fundamentals.
It’s easy to get caught up in the daily grind of the market. However, if you take a look at the following chart, you can see the current trend has been in place for quite a while now. It’s now getting close to a year.
Source: Google Finance
For the Australian share market to move higher and stay there, the first challenge is to break through the upper band of the trading channel. You can see by the circle on the chart that the market has tried to punch through the 5200 level, only to fade and fall back down again.
The price action over the last few weeks shows how much weight is sitting on top of the stock market. For any uptrend to continue, it needs to hold 5200 and stay above that in any future pullback.
Take a look at some of the heavy hitters on the ASX. Like bank stocks, supermarkets (both Wesfarmers [ASX:WES] and Woolworths [ASX:WOW]), BHP [ASX:BHP], Rio Tinto [ASX:RIO] and Telstra [ASX:TLS]. You won’t find too many fund managers who are outright bullish on any of these right now.
This year-long trend is testing buy and hold investors. However, it’s also creating investment opportunities for patient investors to wait for stocks to come to them. Rather than chasing so-called ‘bargains’, these investors will be best placed to profit when the next upturn come along.
for The Daily Reckoning