rebound

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.

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After the price action recovered during the first half of 2009 from a terrible second half of 2008, it plunged back in late June this year. Now the price is trading around 330 cents and is likely to fall even lower, probably to the level of $305. Remember, between early December and the first fortnight of June, corn prices had jumped back by 48%. They reached a high price of 450 US cents on June 10.

During this 6-month bullish period, the price action was backed by an ascending oblique support line. This support line goes through the low of last December (point A on the chart) and through the higher lows posted in February, March, April and June (points B, C, D and E).

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What about the most famous stock index in the world? Where goes the Dow Jones? Is the rebound over?
Let’s see. The rebound drove the price from 6,460 to 8,880 points in 3 months. This is a 37.5% gain. From the recent high at 8,880 points posted on June 11, the index has corrected to 8,198 points before slightly bouncing back to 8,529 points (last closing price this morning).

The current price action looks like a consolidation rather than a real correction. Indeed, it found some support on the low levels of May and above the previous highs posted in last April (see dash blue line on the chart). This is really important as it means that the bullish trend generated in March in still in place. The bulls are still in the market and may push the index higher on the near-term.

The recent pull-back was due to the descending resistance line that capped the price just below 8,900 points. This resistance line comes from the highs posted last year in May (point A) and goes through lower highs posted in September (point B). The recent peak (point C) is the second lower high. The technical indicators show mix signals. The short-term indicators such as the Stochastic Momentum Index (SMI) suggest a bounce that should send the index test once again the resistance line. It would be a second attempt after the one which failed on June 11.

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The oil and gas exploration and production company’s stock (ASX: STO) has been experiencing a positive year so far. Since last October actually. Two technical reasons however argue for a coming retracement, probably within the next few weeks.

STO has been rising from the low point posted on October 17 at $9.32 (point F on the chart). A recent high was posted on March 27 at $16.58, therefore 78% higher than point E. This is where a resistance line capped the price action. This resistance is a descending line that goes through the historical high price posted last year in June (point A) and through lower highs posted during the last 12 months (points B, C, D and E).

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Last month, a new attempt to clear this resistance line failed on point E, at $16.06. A sharp pull-back drove back to the stock to $13.48 (-16%) one week later. The stock rose back during the last month to reach $15 last Friday. However the long-term resistance is likely to hold and prevent a
further rise above $15.5. The upside seems consequently to be limited.

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