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The Experts

Stop, Look & Listen

Michael McCarthy
Thursday, October 11, 2018

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Many long-term investors are advised to look away from the markets. Market “noise” can be a distraction from enacting a sound investment strategy. Instead, they are advised to check their portfolios on a monthly basis, or even less frequently, remaining focussed on their long-term goals. 

However, there are times when investors should pay attention to what the movement of the market is saying. And with the Australia 200 index at an important inflection point, now is one of those times. The movement of the main index over the coming days and weeks may set the market direction for months to come. 

The chart below gives a longer-term picture of the market performance. Each of the black candles represents a week’s trading. The red line is the 6,000 level. Until late last year this was the post GFC high water mark. The market failed to break through on a number of occasions. This resistance level became a support level once the market broke through. 

The green upward sloping line defines the overall up trend in the market since early 2016. On previous sell downs, the index has bounced off these levels. However, if the index breaks through this trend line (currently around the 5930 mark) it points to the end of an uptrend and potentially a market tumble.

The MACD indicator at the bottom of the chart is adding weight to this possibility. Not only is it nowhere near an oversold position, the increasing red gap between the signal lines is describing increasing downward momentum. 

The good news is that the Australian economic fundamentals underpinning the recent gains remain solid. Whether its trade wars or rising interest rates that acts as a trigger for a sell down, neither is likely to represent a threat of the magnitude of the GFC. This brings us to the yellow line on the chart at 5640. This is an important support level, and largely contained the market downside throughout 2017. In my opinion, this level represents a potential turning point if markets do sell down.

Of course, the support represented by the 6000 level and the uptrend line could hold, and the market may bounce from current levels. If this occurs, investors may consider adding to stock holdings on the view the market will test the 10 year highs around 6380. The next few days should tell.

Published: Thursday, October 11, 2018

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