We were paying much attention to the level of the area between 4,000 and 4,100 points on the ASX 200. It was expected to be potentially a resistance zone. But the resistance has been cleared and as a result the index has been taking advantage of its current momentum to continue its rise.
The resistance line, remember, comes from the historical high of early November 2007 (point A on the chart). Two significant lower highs (points B and C) were posted on this line, confirming the bearish trend that had been initiated in late 2007.
After several days where the index moved into a tight range between 4,000 and 4,100 points, it eventually jumped last week and has gained some new momentum. The current signals remain bullish and many investors bet for a further move on the upside during the following weeks.
Indeed, the technical indicators are oriented upward. On the chart, the MACD triggered a bullish signal at mid-July and has been strongly rising for 3 weeks now. Other momentum and oscillators have the same shape.
What is the target then for this current rally? Well, as we anticipated a few months ago (see Money Morning dated May 14), it is likely that the next significant objective will be around 4,550 points. That is 300 points ahead, or 7% higher. The Bollinger bands are widening, the volatility is up. The target could be reached soon.
Two key points argue for an exhaust at this level of 4,550 points. First, the Relative Strength Index (RSI) clearly shows that the index is already overbought. You may know that a stock or index or any other asset can remain overbought (or oversold) for some time. However a high valued RSI usually means that the countdown has started for the trend in place. Here the RSI is valued at 74, above the overbought level of 70.
Second, the level of 4,550 points corresponds to the 38.2% Fibonacci retracement ratio of the decline occurred between November 2007 (point A) and March 2009 (point D). It is likely to be a resistance area where investors and traders will take profits.
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I go along with an objective target in the 4511-4550 zone with the priviso, resistance at 4316 is breached