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.

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Frequently Asked Questions about this Article…

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

According to analyst Alan Clement, the S&P/ASX 200 has been trading inside a long-running symmetrical triangle and is currently testing resistance around 4,370. The index recently pushed through that level but may see a short-term pullback. Clement sees the market as poised to push toward the triangle's upper boundary near 4,780 if momentum holds.

What does trading inside a symmetrical triangle mean for ASX 200 investors?

A symmetrical triangle indicates a long period of consolidation where buyers and sellers are narrowing the range. For ASX 200 investors this means more choppy price action and the potential for a decisive breakout in either direction — a move that would likely require a rethink of strategy.

Is a short-term pullback likely at the 4,370 resistance level on the ASX 200?

Yes. The article notes the index is struggling around the 4,370 resistance and, despite briefly breaking through, a short-term pullback is possible as the market digests that level before any sustained move higher.

What key price levels should investors watch on the ASX 200?

Key levels from the article include current resistance at about 4,370, the triangle's upper boundary near 4,780, a likely consolidation zone between roughly 4,700 and 4,100 over the next six months, and a more distant upper resistance level around 4,900.

What economic factors could hold back the Australian sharemarket?

Two factors highlighted are the ASX's high correlation with commodity markets — many commodity prices are in consolidation or weakening — and a high Australian dollar, which can deter overseas investment by making Australian stocks comparatively more expensive.

How important would a breakout from the triangle be for investors?

A breakout from the symmetrical triangle in either direction would be important. The article recommends watching for a breakout before year-end because it would likely force investors to revisit and possibly change their strategies.

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

The article lists several ways to gain exposure to the ASX 200: trading CFDs, using the SPI futures contract, or investing in exchange-traded funds such as State Street's STW.

What recent market action did Alan Clement describe as a bullish sign?

Clement pointed out that after a selloff in May buyers stepped in and pushed the market higher, turning that selloff into a 'higher low' — a pattern he considers a bullish sign for the ASX 200.