In the short term, we may see a pullback on equity markets. However, the big picture is that equities are in a primary and a secular bull market and while these states hold sway, it is best to have exposure to the stock market.

Many commentators have been talking about the equities bull market for some time, yet the majority of private investors are still sitting on the sidelines or only partially committed. So if it’s all positive, why am I taking the gloss off the stock market at the moment?

Get your timeframe right

I asked that Dorothy Dixer so that I can emphasize that I am talking about a short term and a shallow pullback, not an end to the equities bull market, which still has quite some time to run in my view. Let’s turn to the chart of the All Ordinaries Index below to explore why a short-term pull back may occur.

The first point to make is that the All Ordinaries, and ASX200 for that matter, are both below the high that they reached back at the end of October last year, some seven months ago. This indicates indecision or failure for buyers to display buying conviction to overcome sellers that come into the market at these levels.

The upper blue rectangle shows a resistance zone that the All Ordinaries has unsuccessfully attempted to penetrate on six occasions since late February. The last attempt failed with a fall below the resistance zone yesterday (4 June), the red bar showing this at the rightmost section of the chart.

Source: Beyond Charts

What constitutes ‘failure’ as I have used it in this context? This can be subjective and different chartists might provide different answers. However, over the years I have evolved a simple rule that I use for confirming a price breakout, or the failure thereof, for equities index charts, not necessarily for stocks charts. A failed breakout occurs when the index closes above the breakout zone for greater than five consecutive trading days. Of course, where to place the breakout zone is in itself subjective and can take years of using technical analysis to gain a trained eye.

A couple of weeks ago I provided commentary on the S&P500 and noted that it may get to the 1920 – 1925 zone, which is a 138.2 Fibonacci extension zone, before a retracement may occur. The S&P500 is exactly in that zone right now on declining volume and narrowing daily range.

Furthermore, the Dow Jones Industrial Average had an ‘inside day’ on Tuesday, with sellers ending the day in control, an indication of indecision and potential change in trend in the short term.

How far the pullback?

The All Ordinaries could fall as far as 5300 – 5315 or halt its decline as shallow as 5400. A fall below 5300 – 5315 could see it fall to the 5180 level but I believe that the latter is a very low probability at this stage.

If support is found at the 5400 level or thereabouts, this would be an indication of strength from which the All Ordinaries can base its next upward thrust.
On the upside, the All Ordinaries really needs to get above 5500 and remain there for at least a week to provide its next platform to rise further.

In summary, given the economic environment of low interest rates and a far from overbought equities market, in my view there is a very low probability of a significant retracement at this stage.

Gary Stone is the Founder and Managing Director of Share Wealth Systems.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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