Benchmark index looks set to make a run towards 4800

It's been a tough few years for share investors but for the first time in a long time there is some good news coming from the Australian sharemarket.

By InvestSMART · 18 Sep 2012

By InvestSMART ·
18 Sep 2012

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It's been a tough few years for share investors but for the first time in a long time there is some good news coming from the Australian sharemarket.

As this week's analysis provided by Alan Clement, an international futures trader and member of the Australian Technical Analysts Association, shows, the

S&P/ASX 200 Index has been trading within the symmetrical triangle formed by the two dashed red lines on the chart since 2009.

In heavy selling in mid-2011 the index was sent tumbling from the upper boundary of the triangle to the lower boundary in one quick move, which ultimately exhausted the sellers and marked the low point for the year.

Following that fall, the market spent seven months consolidating in a tight wedge formation, only to fall through the bottom last May.

Buyers then quickly stepped in following the breakdown and have since pushed the market higher to recover almost all the losses, turning May's selloff into a "higher low", which Clement sees as a bullish sign.

At present the index is testing resistance at 4370 and actually broke through this level last Friday. However, we may see a short-term pullback as the market struggles around this resistance point.

"Ultimately, though, the market looks poised to break through the resistance and make for the upper boundary of the triangle, currently at around 4780," Clement says.

While Australia's economy is better than its US counterpart, Clement sees two factors holding our market back as Wall Street nears 2007 highs. The first is a high correlation with commodities markets, which are in consolidation phases of their own at present, with many commodity prices weakening this year. The second is the high Australian dollar, which stifles overseas investment by making stocks comparatively more expensive.

Those factors could impede upward momentum in the market. If and when the S&P/ASX 200 reaches the upper boundary of the symmetrical triangle there is more likely to be further consolidation within the triangle between 4700 and 4100 for about the next six months than an immediate move to the upper resistance level of 4900, Clement says.

Keep an eye out for a breakout from the triangle in either direction before the year's end, as that would demand a rethink of strategy. Investors can gain exposure to the ASX 200 Index via CFDs, the SPI futures contract or

exchange-traded funds such as State Street's STW.

This column is not investment advice.

rodmyr@gmail.com

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Frequently Asked Questions about this Article…

What is the current technical outlook for the S&P/ASX 200 index?

Technical analyst Alan Clement says the S&P/ASX 200 has been trading inside a long-running symmetrical triangle since 2009. The index is testing resistance at about 4,370 (it actually broke this level recently), may see a short-term pullback around that resistance, but looks poised to push higher toward the triangle’s upper boundary near 4,780 if buyers remain in control.

Could the ASX 200 make a run toward 4,780 (around 4,800)?

According to the article, Clement believes the market looks set to attempt a move to the triangle’s upper boundary at roughly 4,780. However, he also cautions that the market is more likely to spend time consolidating inside the triangle (between about 4,700 and 4,100) for the next six months before any immediate move to higher resistance levels such as 4,900.

Which price levels should everyday investors watch on the ASX 200?

Key levels mentioned are the near-term resistance at 4,370, the triangle’s upper boundary around 4,780, a likely consolidation band between roughly 4,700 and 4,100, and a higher resistance level near 4,900. A breakout from the triangle in either direction would be an important signal to monitor.

What does a 'symmetrical triangle' mean for ASX 200 price action?

A symmetrical triangle is a chart pattern formed by converging trendlines (upper and lower boundaries). In the ASX 200’s case the pattern has contained price action since 2009, so a breakout above or below the triangle would be meaningful and could require investors to rethink strategy, while continued trading inside the triangle often leads to periods of consolidation.

What factors could hold back the Australian sharemarket’s move higher?

The article highlights two main headwinds: (1) a high correlation between the Australian sharemarket and commodities, and many commodity prices are in consolidation or weakening phases this year; and (2) a high Australian dollar, which makes Australian stocks relatively more expensive to foreign investors and can stifle overseas investment.

Is a short-term pullback likely even after the ASX 200 broke 4,370?

Yes. The article notes the index broke through 4,370 recently but may still experience a short-term pullback as the market struggles around that resistance point before potentially resuming a move higher.

How can everyday investors gain exposure to the ASX 200 index?

The article says investors can gain exposure to the ASX 200 via CFDs, the SPI futures contract, or exchange-traded funds such as State Street’s STW ETF.

Who provided this analysis and is it investment advice?

The analysis was provided by Alan Clement, described in the article as an international futures trader and a member of the Australian Technical Analysts Association. The column itself states that it is not investment advice.