The Australia 200 index has had a stellar run since December 24, gaining more than 16% in less than three months. However, the price action is now pointing to weakening, and the potential for a correction could be increasing. Last week’s miss on GDP numbers and softer than forecast retails sales growth follow an uninspiring February reporting season. It may be time for investors to batten down the hatches.
The price of a stock, or of the broader market index, is a reflection of the balance of investor opinion. It’s a sincere opinion, because participants are putting money on the line in expressing those opinions. Professional investors and traders use charts to assess the overall balance of views, and pay particular attention when price trends change.
The chart of the Australia 200 index tells the story. The sharp rise this year produced a very sharp up trend, illustrated by the green line. Action over the last few days has broken that uptrend.
The MACD indicator at the bottom of the chart is also sounding a warning. The black signal line has crossed the red, pointing to a potential sell signal. This cross over has occurred well above zero, adding weight to the concerns. The MACD is also showing bearish divergence, refusing to make new highs despite the index doing so over the last three weeks.
In my view, the support/resistance level at 6140 is a key. The index is threatening a break, and a close below 6140 could signal further falls to come. Investors following an active strategy may decide to act if this break occurs.
The depth of any fall is hard to predict. The long-term charts show that the 6000 level has proved a turning point many times, and it may cushion any falls. A drop through that level could bring a target at 5750 into view, with a stretch target at 5400 (the December low) a possibility.
Whether or not to act on this technical picture is up to individuals, depending on their personal investment strategy and circumstances. Long-term holders may prefer to stay in the market and ride out any pullbacks. From a market point of view, any holdings that failed to rally with the gains from December until now may be worth closer examination.
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 regard to your circumstances.