This has been a tough week on the markets. One day is white, the next day is black. The pause in the bearish market has been very short then. Monday and Tuesday have been bullish sessions thanks to the governments’ guarantees around almost all over the world. Yesterday the S&P/ASX 200 fall back by 6.67% to 4,013.40 points.
As we were mentioning in our last update (MM of October 1st), the bears still drive the market and will probably lead it to lower levels.
As the retracement levels (after 4 years and a half of continuous rise between March 2003 and November 2007) considered as intermediary supports have all been cleared one after the other, and the next support is 500 points below the current level. It’s another 12.5% fall away. This objective, at 3,500 points, is an old previous high level which acted as a resistance in 2001, 2002 and 2004 (points A, B, C and D on the weekly chart). Once cleared, it became a new low (point E) and was an impulse point for a new rally phase in the second half of 2004.
Let’s have a look at the more recent action development on a daily chart. We plot the Bollinger Bands (which is a band plotted two standard deviations away from a simple moving average) on the Index chart to note that the volatility has been strongly increasing. Because standard deviation is a measure of volatility, Bollinger Bands adjust themselves to the market conditions. When the markets become more volatile, the bands widen as they move further away from the average. During less volatile periods, the bands contract as they move closer to the average.
Here the bands widen as the market moves up and down sharply. The price is thought to be oversold if it continually touches the lower band.
The momentum indicators are still bearish. The Momentum and the MACD are oriented on the downside. The Technical Momentum Indicator has hit extreme low levels (same levels that those posted at the bottom of last January) whether the MACD has not reached its previous lows of January 2008.
The current volatility shows that the market is nervous. In such conditions, a sustainable rebound sounds difficult, added to the lack of immediate support. That’s why a further move down towards 3,500 points is probable. It would drive all the indicators in extreme negative and oversold levels that would constitute then a basis for a bullish correction.
Good Investing,
Gabriel