The inevitable pullback looks to have been triggered and the market seems set for more falls. But the longer term equation has improved.

Finally, it looks like the pullback everyone has been waiting/wishing/praying for is upon us, with the trigger seemingly being a change of tone in the latest Federal Reserve minutes and rumours that a commodity hedge fund is in trouble, which resulted in commodities getting slammed, including stocks.

The latest minutes showed that there were differing views over continued stimulus, with the exact wording being ‘several on the FOMC said the Fed should be prepared to vary the pace of quantitative easing'.

It's only been a matter of time before the Fed had to start broaching the subject of how it slows the printing presses, so to say it's surprising is a little far-fetched in my view. From a glass half full perspective, it means the economic landscape is getting better and the board is beginning to think that it does not need as much stimulus going forward. This, in my eyes, is very encouraging.

Today’s intraday price action is the first time in a while I have not seen the money come into quickly buy the dips. Instead, the S&P/ASX 200 has continued to make lower highs and lower lows, which indicates that people are actually selling and locking in profits following the incredible run we have had.


The chart above is an hourly chart of the index since late December. As you can see, there are one or two periods which look like what we are seeing today, and they were both quickly met by a swarm of buying.

However, the reason I think today is a bit different to those two events is because there is a genuine reason why the markets have become a little less certain: the Fed minutes.


Source: Iress

The above chart is of the S&P/ASX 200 index during afternoon trade. As it stands, you can see that today’s fall is easily the biggest we’ve since the mid-November post-US election lows. Gees, it’s been a good run!

So now that it looks like a pullback has begun, the hard part is trying to determine how far it might retreat.


Source: Iress

This is far from an exact science so bear with me. On the above weekly chart, I have marked a large support zone between 5025 and 4940. The psychologically important 5000 level is in this zone too, so that cannot be discounted.

If the market finds enough buying support within this zone and then resumes its trend higher then it tells us that we’re in an incredibly strong bull market and that the ‘buying the dips’ strategy I’ve spoken about so often is well and truly in play.

I think the pullback will be somewhere in the region of 3 to 5 per cent, which means it will find strong support between the 4850 and 4950 levels. Having said all this, anything can happen at any time so it will just be case of interpreting what the price action is telling us.

So to sum it all up, I’m modestly bearish in the short term but remain very bullish in the medium to long term. Hence, these pullbacks will likely represent great buying opportunities.

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