From a charting perspective there is no argument (well not in my mind anyway) that (a) we are due for a correction and (b) said correction will surely come as day follows night. But when is the unknown. Please read my blog for 10 September 20212 for greater elaboration on my outlook for the XAO

If we look at the XJO for the past 12 years it shows price has respected a large price channel and since the March 2020 Covid crunch try price has been respecting a tighter steeper channel as prices head back to where they might have been without the Covid anomaly (charting doesn't provide for anomalies - so this is a tag of my own). 

XJO 10Sept21 large

If we look at the recent price action in more detail it shows we have hit the ceiling and while a small overshoot is not impossible, the most likely scenarios from here are that price will seesaw sideways along the top channel of that larger price channel until something comes along to push the market into a correction or a bear market.  At the moment a fall to 6900 (XJO) would see a 9% fall from the recent highs which is close to the technical 10% correction. 

XJO 10Sep21

The red dashed line is a line of support that price has held above since February and yesterday price bounced ever so slightly off that support. I expect price will recover today but any recovery is being squeezed between said red support line and the top boundary of the large price channel - so I'd see a significant recovery unlikely. 

In short I see the start of lower prices has probably started. As always there will be the odd stock that goes against the flow and the occasional pattern break that results in short sharp gains for some stocks that are not near their highs. But when the market as a whole moves down those speculative rises are usually more restrained because they are swimming against the current.

Once we have a correction then there will be a period of recovery and new trading opportunities - before we do it all again!

16 July 2021

While I comment on the XAO in my Weekly Blog I haven't updated this thread for 3 months - which underlines how little the index is moving. The daily chart below clearly shows price has been struggling to break above 7650. It also shows the daily closes are generally creeping higher and that the last 3 days have shown below average volatility. Where to from here? Writing this Friday morning and historically I've always seen Friday as a red day and one not to buy on. However, looking at the past 8 Fridays, 7 of them have been green days. You could take that as meaning today is overdue to be negative or that it will keep with the program and end up positive. I still feel price will jump higher but probably needs some positive news re Covid to do so. Personally, I could see price fall back to around 7560 in line with the seesaw pattern of the past 5 or 6 weeks, followed by another rise back to present levels - hopefully breaking the overhead resistance and moving up to 7830 or so.

XAO 16Jul21

 

9 April 2021

This week the XAO had its best week since November 2020 to break what has been a stagnant market of some 19 weeks of weekly opens and closes trading in a narrow 5% band. This sideways move isn’t anything particularly unusual with some 18 weeks from June to October 2020 showing a similar pattern.

Many have been saying the market would rollover and fall out of this recent pattern into a correction or bear market. While I have agreed that was a real possibility, and one traders should be cautious of, for a few months now my preferred probability has seen price going higher. Why? If we look at the Big Picture of the XAO below you can see that there is a line of good fit below price action back to the 1980’s. Price usually travels in price channels over long periods of time, so drawing a parallel line to that below price but through the peaks, we get the large channel shown on the chart. With there only being one significant peak (the GFC) this upper channel boundary could actually be a little lower than shown, because the pre-GFC peak may have been an over-throw (where the momentum of price rises or falls carries them above or below resistance/support levels). This channel tells us price is currently close to its likely highs before retracing.

XAO large 9Apr21

The small, steeper price channel since 2009 shows the Covid fall as an example of an overthrow. Note that current price is not at the top of this smaller channel and to preserve the symmetry of the channel I have felt there was the likelihood price would rise to fill that gap. Also, the two upper boundaries of the price channels are converging on a level of approximately 7500 to 8000 (its a bit rubbery because, as noted, the placement of the large channel upper boundary is somewhat ‘rubbery’)

XAO 9Apr21 medium

Anyway, the final deciding factor for me, as a chartist, was that the recent price action formed a triangle (called a pennant pattern because of its shape – see blue dashed boundary lines on the chart below). Pennant patterns are called continuation patterns because when price eventually breaks out of the pennant it almost always ‘continues’ in the same direction as the trend in place prior to the pattern (an uptrend in this case – suggesting price would rise out of the pennant).

XAO 9Apr21 small

So where to from here? The action by price over the past 6 months or so and the break higher last week suggest a target of 7500. There are charting theories that give two targets of 7498 and 7512 but these are too complex to discuss here.

History suggests price always falls back from a significant high but there is no way of being sure 7500 will be a significant high. Price could fall into another sideways action and drift sideways, possibly following the rising channel boundary towards that theoretical 8000 (which would be a psychological resistance for investors). Somewhere here the chill wind of Winter will strike and the market will correct. What the catalyst for that will be is anyone’s guess – Covid MkII, interest rates, Taiwan, asteroid strike (which did it for the dinosaurs!). Whether that major correction will be next week or next year is also unknown, so it has to be business as usual until then. However, the cautious trader will be moving (if they haven’t already done so) to a more conservative trading approach to minimise their losses when the correction comes. The simplest way to protect your capital is to avoid/quit all shares that are speculative, low value (under 10 cents) or low liquidity (average trade of less than $1M a day) and use a stop loss based on a percentage fall below higher weekly troughs or a break below a trend line. Its a pretty boring form of trading but it will minimise your losses and if you have picked good stocks it will maximise your profits (picking ‘good’ stocks is the potential issue here of course).

I comment every week on the performance of my hypothetical long-term portfolio I run for anyone who has my educational material or uses my mentoring services. Set up in November last year using trading rules anyone could manage and only checking the trades once a week, it had a slow start because a few of the 10 shares I picked didn’t fire and were sold. That portfolio hasn’t had to close out any trades for a couple of months and, showing an annualised profit of 30% (after losses on the closed trades), has performed better than my own short term trading (which always struggles in a sideways or falling market). Running this portfolio has been an education for me as well and has caused me to modify my own approach to trading. Anyone who thinks, this is all well and dandy, but they couldn’t do it because they don’t have any charting knowledge, I could teach the basic rules to my Koolie dog in about 30 minutes. You don’t need to understand my comments above about the XAO – it is just three simple rules and perhaps an hour of time once a week.

Contact

Robert Norman

Phone: 0428 346 951
Email: robert@sharecharting.com.au

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