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.


Robert Norman

Phone: 0428 346 951

Sorry, this website uses features that your browser doesn’t support. Upgrade to a newer version of Firefox, Chrome, Safari, or Edge and you’ll be all set.