One Last Step Before The Correction

One Last Step Before The Correction

Here we are. The main Australian stock index (ASX: XJO) is about to reach the main target identified since the rebound has started in last March. Actually there is one final step to climb, and this could occur today (Friday August 14). The index closed yesterday at 4,436 points, 100 points below the objective. This objective is the level around 4,550 points. Maybe a bit lower.

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As mentioned several times in previous updates published in regular Money Morning, there are several indications that clearly argue for a correction after the price action will hit this target. As I am currently writing this update, the Index is approaching the level of 4,500 points. This is probably the last bullish session before the correction. The last step is almost done.

Let’s do a quick review of the indications that make me expect an imminent correction.

1. The correlation between global equity markets: the main index in the US, the S&P 500, the most popular benchmark for fund managers and investors, has reached the 38.2% Fibonacci level of its decline occurred last year (actually between the extreme high of October 2007 and the low of March 2009). This is a resistance level and many other indices worldwide have reached the same level. This of course the case of the ASX 200 around 4,530 points (38.2% retracement between points A and D).
2. This level corresponds also to a previous low where the index found temporally some support in last September (see in blue rectangle). At this time the two lows posted were at 4,527 and 4,540 points. As you know, previous lows often become new highs.
3. The Relative Strength and most of the technical indicators have reached extreme high values. The RSI is in its overbought area (above 70) and bounced on the 70-line last week. However it shows that the ASX 200 is overbought since late July. There is little potential on the upside therefore the risk is downward.
4. A trading system based on the Chande Momentum Oscillator that detects well the highs of the chart has just triggered a “sell” signal. This trading system previously detected the tops posted in October 2007 and in May 2008.

It’s obvious that it is time to sell the index. The Bollinger bands suggest a potential correction to the 4,000 points, the level of its lower band. It is also the level of the resistance line which has been cleared last month. Remember, it 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. This previous resistance could become a new support and is therefore the target for a correction. A correction from 4,530 points to 4,000 points would represent a fall of less than 12%.

— The idea would be then to SELL the index XJO above 4.500 points. The stop-loss should be placed above the identified resistance therefore just above 4,550 points. You may place your take-profit order around between around 4,000 points, the first significant support area.

Tagged as: Australian stock index, Bollinger Bands, Bullish, correction, Fibonacci, global equity markets, investors, rebound, rsi, XJO