Charts fighting against the bulls

The ASX 200 has breached a key support level according to chartists and a downtrend looks likely for local shares.

Strength in global manufacturing, and better-than-expected building approvals and export data for Australia, appear supportive of higher share prices over the next 12 months. Fundamentals aside though, the daily chart of the benchmark S&P/ASX 200 Index shows a clear breach of support and an emerging downtrend.

A break below 5,280 implies a short term target of 5,200 is on the radar, say technical analysis experts. Falls through this level could see the index test support between 4,980 and 5,025 –  a fall of around 5 per cent from here, chartists warn.

"It is hard to sell this market, going against improving fundamentals," said Michael McCarthy, chief strategist at CMC Markets. "It’s possible any pull back may be shallow and short lived. However, no-one can state that with certainty." He warned shares such as ANZ, BHP, Commonwealth Bank, NAB, Rio Tinto, Telstra and Westpac are unlikely to avoid the downdraft.

Market positioning might explain why the market could be in for a pull back despite good data locally and internationally, and a low interest-rate environment. The global recovery over this half year has encouraged talk of a “Santa Claus" rally and this may have led to the market getting ahead of itself, taking the index to five-year highs.

"The marginal buyers are in, and there is no-one left to catch any selling," McCarthy said.

Investors leaning on dividend yields may choose to ride out any downturn while more active investors may trim holdings or buy put options.  Short-term traders may start by targeting near-support with a stop-loss order above 5,280, he said.

Graph for Charts fighting against the bulls

Source: CMC Markets

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