Blue chips feeling bite of the downturn

Nothing can really be considered safe, with the end of troubled times a long way off, writes Rod Myer.

Nothing can really be considered safe, with the end of troubled times a long way off, writes Rod Myer.

The blue chip end of the sharemarket, which was the investor's friend for the best part of the 20 years leading up to the global financial crisis, was difficult and frustrating last year.

And according to analysis provided by Alan Clement, an international futures trader and member of the Australian Technical Analysts Association, the situation may not improve in a hurry.

In the graph of the ASX 200, below, Clement identifies what technical analysts know as an "ascending triangle" which formed during late 2010 and early 2011. That formation is normally seen as a bullish indicator, built on a series of "higher lows" where price fluctuations come off a rising base.

Analysts thought that ascending triangle would push the market through the top blue resistance line and reach 5000 points. But scares about the banking system and the euro zone intervened and, after a brief spurt to 4973 in April, the market turned south and broke back through the red dashed upwards trend line.

Investors then appear to have panicked and a quick liquidation of stocks saw the index crash some 1100 points. Clement describes that sell down as an "impulse move" and says such events are usually followed by periods of consolidation.

That is exactly where we find ourselves now. In the last few months, the index has been trading in a tightening range where the low points have risen further than the high points in the trading range, forming what Clement calls a "rising wedge pattern".

Technical analysis brings its version of the laws of physics to bear on a rising wedge pattern, seeing it as something akin to the spring being tightened, restricting the market's range. Eventually the tension is too much and the rising wedge formation snaps, generally to the downside, market history tells us.

"If this rising wedge is to produce another leg to the downside, we would first expect the market to retrace at least 50 per cent [the middle dotted blue line on the graph] of the initial impulse move down. This could take the market back up to the 4400 level in the near term, which would coincide with resistance at the upper boundary of the wedge formation," Clement says.

And how deep will any market dive likely be? Clement says we could expect a repeat run of the impulse move down to 3300. But, Clement says any such move could still be months away. A bullish case is hard to make but an upside break from the wedge is a small possibility Clement says investors should consider.

There are lots of ways for investors to trade the ASX 200 without buying all the shares that make up the index. Contracts for Difference are available from a number of providers and the SPI 200 futures contract closely mirrors the index as well. An Exchange Traded Fund in the index is offered by State Street.

Remember this column is not investment advice. Using leveraged products, such as those mentioned, can carry greater risk than shares. Always consult a licensed financial advisor and do some homework before risking your capital.

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