Strategies simple as A, B, C

With talk rife about the resources boom drawing to an end, this week Mark Umansky, a certified financial technician and councillor with the Australian Technical Analysts Association, casts his professional eye over the S&P/ASX 200 Resources Index, which includes mining, metals and energy stocks. While traders often focus on short-term price moves, we look at the resources sector over the long-term using a yearly chart to paint a picture of underlying market trends.

With talk rife about the resources boom drawing to an end, this week Mark Umansky, a certified financial technician and councillor with the Australian Technical Analysts Association, casts his professional eye over the S&P/ASX 200 Resources Index, which includes mining, metals and energy stocks. While traders often focus on short-term price moves, we look at the resources sector over the long-term using a yearly chart to paint a picture of underlying market trends.

The chart going back to 1992 shows that resources for 10 years were in a controlled upward trend channel with both support and resistance lines rising in parallel. Then, in 2002, the bulls overcame the bears and the resources index broke decisively on the upside, signalling the start of the China-driven resources boom that has largely underpinned the economy since then.

The index reached an all-time high of 6030 points in 2007, but the bears stalked the market, with the onset of the global financial crisis pushing the index back to lows of 3817. The bulls re-entered the market during 2008, with China's decision to reflate its economy adding momentum to the uptrend.

By early 2010 the index had recovered most of its GFC losses. Later in 2010, the bears returned and have consistently pushed the market back down since to current levels of about 3900. This pattern, Umansky says, allows private traders to profit when one side of the professional market overcomes the other. Using the chart, there are three outcomes traders can set themselves to profit from, stategies A, B and C.

Strategy A involves a strong breakout on the upside, which would see a new all-time high somewhere about 8300.

Strategy C would involve shorting the market in the expectation that negativity about resource prices remains in place and grows, pushing the market down below the rising support level prior to the outbreak of the resources boom projected upward. The projected downside target with this strategy is about 1600 points.

The third possibility, strategy B, is the continuation of the congestive channel - in which case traders could be nimble, trading up and down within the band limits.

Whatever strategy is chosen, traders should use stop losses to protect positions. And traders should move with the trend. That means being prepared to move quickly if the markets take unexpected directions. Investors wanting exposure to the index can choose contracts for difference, options and futures.

This column is not investment advice. rodmyr@gmail.com

ASX200 Resources Index

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