Kris Sayce (KS): Months ago you told Money Morning readers that the 3500 point level on the S&P/ASX 200 was a key support level. At the time the market was trading at close to 5000 points, so it was a good call. What’s your take on how the market has moved since you made that call?
Gabriel Andre (GA): Until yesterday, the S&P/ASX 200 had been moving in a trading range since late November. But the strong slide yesterday sank the index below the lower band of the range. This is a clear bearish signal and it opens the door to further development on the downside.
Roughly, the index was capped on the upside at 3,800 points and limited on the downside at 3,500 points. This channel appeared to be a consolidation phase after the strong decline occurred between September and November 2008.
KS: So, are you saying this market has further to fall?!
GA: For technical analysts it’s a typical pattern. The direction of the price action on the near term largely depends on how prices will exit the channel. A breakout above the 3,800 points would have given some fresh momentum for a further rally. However it looks like the sharp drop yesterday on the local equity market is now arguing for the opposite way.
KS: What makes you say that?
GA: Well, the index closed at 3,476.60 points, below the low of the trading channel posted on December 5 at 3,485 points. It should more than likely trigger from today a short-term bearish movement that could send the Index towards the lows of last year.
The MACD had already decided and anticipated this exit on the downside as it crossed below its signal line last Thursday: this was a clear “sell” signal.
KS: It was just the price action from the last couple of days though was it?
GA: No, the key point has been reached two weeks ago. This is when the market decided that a continuation of the rise started just before Christmas was not justified anymore. First clue: the volumes during those bullish sessions were quite light, which means that there is not enough pressure from the buyers to create some durable momentum. Remember that prices are the shadows of the volumes and consequently it is the volume that often needs to be tracked. Volumes create prices and in late December and early January, volumes were not big enough to create significant higher prices.
For the second clue take a look at this chart…
…on January 7, the price action failed to break above the resistance line of the channel. Actually this level corresponds to the 50% Fibonacci retracement ratio of the negative trend occurred in November – that’s between points A and B on the chart.
KS: So, give me the bad news. What are the next key levels for this market?
GA: Now the immediate targets for the price action are the lows hit in November, first at 3,353 points which is the lowest closing price of the year, and then 3,217 points that is the lowest during intraday session. Respectively those levels are 3.53% and 7.45% away from the opening price this morning at 3,476 points.
Cheers,
Gabriel Andre