January Effect points to a better 2012

LAST year will be remembered as a disturbing one on many fronts. The waves of negativity overseas buffeted global markets, while Australia suffered its own domestic discontent as well.

LAST year will be remembered as a disturbing one on many fronts. The waves of negativity overseas buffeted global markets, while Australia suffered its own domestic discontent as well.

The January Effect suggests the sharemarket performance in the month of January has an impact on its behaviour for the rest of the calendar year.

Some say it is the first five days of January that are the most important, others would rather rely on the entire month. Either way, a good January could lead to a strong year.

As we begin 2012, we can be encouraged by some initial positives in the All Ords, with the first few days higher on last year's end, bolstered by stronger base and precious metals. With this in mind, we have chosen three stocks involved in a mixture of gold and base metals.

Significant base A large base has been forming from mid-2006, with the 2008 low point pivotal within the phase. During 2011, the price oscillated within the final segment of the base and we suggest that this situation is likely to continue as the action progresses towards completion. The broad parameters of the phase lie between 7? and 20? but the price may churn in a tighter range between 10? and 13?, providing internal guides. An upward breakaway through 20? would complete the base, with initial resistance at 23?-25? but with the potential towards 35?, 55? and beyond.

"V" reversal The share price has had a volatile path from 2004, with lows at 7? in 2008-9 and a high at $1.50 mid last year. The recent action from December 2010 has become more balanced and the drop to 70? in December 2011 exhibits a marked resemblance to the March 2011 drop and recovery. At that time, the price formed a "V" reversal, consolidated and rallied higher. A similar performance would see the price pause between 95? and $1.05 before breaking higher at $1.25-$1.30. A breakthrough of this level would affect the longer-term upward potential for the stock.

Key support When the price dropped to 20? last August and again in December, it had reached a key support level, with the subsequent oscillations above this level forming part of a selling exhaustion phase. In the near term, the price may oscillate in the 23?-30? range ahead of completing the phase and breaking the downward trend at 35? for a test of resistance in the 40?-45? range ahead of moving towards 60? and potentially much higher. At this stage, the risk factor is low but a drop below 20? would return the price to the downward draft.

Regina Meani is a freelance consultant and author of Charting (Wrightbooks). The views expressed are those of the writer alone and investors should seek independent advice.

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