'Rising wedge' offers warning on market index

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.

By InvestSMART · 7 Feb 2012

By InvestSMART ·
7 Feb 2012

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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 S&P/ASX 200, 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 the 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's exactly where we find ourselves now. In the past few months, the index has formed what Clement calls a "rising wedge". Technical analysis brings its version of the laws of physics to bear on this pattern, seeing it as something akin to a spring being tightened, restricting the market's range. Eventually the tension is too much and the rising wedge formation snaps, generally to the downside.

"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) 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 is any market dive likely to be? Clement says we could expect a repeat run of the impulse move down to 3300. But keep in mind that he says any such move could be months away. A bullish case is hard to make but an upside break from the wedge is a small possibility that Clement says investors should consider.

This column is not investment advice. Always consult a licensed financial adviser and do some homework before risking your capital in the market.

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Frequently Asked Questions about this Article…

What technical pattern did Alan Clement identify on the S&P/ASX 200 and what does it mean for investors?

Alan Clement identified an ascending triangle on the S&P/ASX 200 that formed in late 2010 and early 2011. An ascending triangle is normally seen as a bullish technical pattern built on a series of higher lows, and analysts initially expected it to push the index through resistance toward 5000 points. However, subsequent market scares prevented that breakout.

Why did the S&P/ASX 200 fail to reach 5000 points after the ascending triangle formed?

After a brief spurt to 4973 in April, worries about the banking system and the euro zone interrupted the breakout. Those scares triggered investor panic and a quick liquidation of stocks, which caused the index to crash about 1,100 points instead of continuing to 5000.

What is a 'rising wedge' and why should everyday investors pay attention to it in the S&P/ASX 200?

A rising wedge is a technical pattern where price movement narrows as it rises, like a tightened spring. Technical analysts often see it as tension building in the market that typically resolves to the downside. For investors, a rising wedge on the S&P/ASX 200 signals a higher likelihood of a corrective move, so it’s a warning to be alert to risk.

If the rising wedge breaks down, what near-term market level might the S&P/ASX 200 reach first?

Clement says if the rising wedge produces another leg down, the first expectation would be a retracement of at least 50% of the initial impulse move down. That retrace could push the market back up to about the 4400 level in the near term, which would also act as resistance at the upper boundary of the wedge.

How deep could a market dive be if the rising wedge snaps to the downside?

Clement suggests a repeat of the earlier impulse move down could take the S&P/ASX 200 as low as around 3300 points. He also notes any such deep move could be months away, not immediate.

Is an upside breakout from the rising wedge completely ruled out?

No. While Clement says a bullish case is hard to make and the rising wedge usually resolves lower, he acknowledges a small possibility of an upside break from the wedge that investors should consider.

What is an 'impulse move' and how does it affect market behavior according to the article?

An 'impulse move' is a rapid, sharp sell-down or buy-up in the market. Clement describes the 1,100-point drop as an impulse move; such moves are usually followed by periods of consolidation, where the market trades in a narrower range—like the rising wedge observed now.

What should everyday investors do in response to technical warnings like the rising wedge on the S&P/ASX 200?

The article stresses caution: technical patterns offer warnings but are not guarantees. Everyday investors should do their homework, be mindful of possible retracements or deeper declines, and always consult a licensed financial adviser before risking capital. This column is not investment advice.