The blue-chip end of the sharemarket was difficult and frustrating last year.
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.
Frequently Asked Questions about this Article…
What did the article say about the recent performance of the blue‑chip S&P/ASX 200 index?
The article explains the blue‑chip end of the market was difficult and frustrating last year. Alan Clement, an international futures trader, notes the S&P/ASX 200 failed to push through resistance near 5,000 (peaking at 4,973 in April), then plunged about 1,100 points in a rapid sell‑off and has spent months consolidating since.
What is an 'ascending triangle' and how did it affect S&P/ASX 200 expectations?
An ascending triangle is a bullish technical pattern built on a series of higher lows with a horizontal resistance line. Analysts thought the triangle would push the S&P/ASX 200 through resistance toward 5,000, but banking‑system and euro‑zone scares triggered a reversal before that breakout.
What is a 'rising wedge' pattern and why is it a warning for everyday investors?
A rising wedge is a technical pattern where price swings narrow as the market's range tightens, like a spring being wound tighter. According to the article, it usually resolves to the downside, so its presence on the S&P/ASX 200 is a warning that a further leg down is possible.
If the rising wedge breaks down, how far could the S&P/ASX 200 fall according to the analysis?
The article cites Clement’s view that a downside from the wedge could repeat the prior impulse move and take the index down toward about 3,300, though he warns such a move could be months away.
Could the market bounce before a bigger drop? What retracement levels should investors watch?
Yes — Clement expects an initial retracement of at least 50% of the earlier impulse decline, which could lift the S&P/ASX 200 back to around the 4,400 level. That retrace would also coincide with resistance at the upper boundary of the rising wedge.
What does the article mean by an 'impulse move' and 'consolidation' in market terms?
An 'impulse move' refers to the sharp, rapid sell‑off (the article describes an ~1,100‑point crash) and 'consolidation' is the period of choppy, range‑bound trading that typically follows such a fast move as the market digests the change.
Is an upside breakout from the rising wedge possible, and should investors count on it?
The article says an upside break from the wedge is a small possibility but that making a bullish case is difficult given the pattern’s typical behaviour. Investors should treat an upside breakout as possible but not probable based on this analysis.
What practical steps does the article recommend for everyday investors facing this technical warning?
The column reminds readers it is not investment advice and recommends consulting a licensed financial adviser and doing homework before risking capital in the market. In other words, consider professional guidance and your own research when responding to these technical signals.
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