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The ‘gay abandon’ of the last few months – or even year or so – has sort of disappeared. Ebullient analysts and buyers have suddenly become cautious. Not a lot has changed, however, not even the jobs reports from the USA. What has changed is perception. It is human nature that just a couple of weeks ago the sentiment was ‘we have seen the worst and things can only get better’ but is now ‘oops, maybe things are not so good after all …jobs reports…US deficit…European bailouts…’.
Investors are now looking back rather than forward and some are also looking at the buys they have made over the last two years of range trading. Buying for the long-term in a range trading market is potential suicide. And if not death you could still endure a lot of pain as you may have to wait several years before you are back in the black.
I don’t expect equity markets are going to fall out of bed but there is some more downside. Let’s take a look:
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This chart shows two levels of support for the All Ords – one at 4,600 and the other at about 4,300. Please excuse the round figures as I only want to talk in broad terms in this article.
Interestingly, as I write, the market is at exactly 4,600 and seems like it wants to bounce off. But how long it can stay above that level is anyone’s guess. I am going to say it can’t and suggest we look to the next level of support, which is 4,300.
Lines of support and lines of resistance are often one and the same. They are both simply levels of activity. 4,600 has seen a lot activity, which has been both support and resistance – but mainly support - and there is also strong support at 4,500. 4,600 is also a double bottom if the market was to hold above this level.
4,300 looks especially weak as a support level and I expect the market will fall below this. This is my scenario:
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I predict a small relief rally and then a slide to about 4,200. Not in one slide though - as some bargain buying will provide the occasional up day - but overall a definite trend down with high volumes at some stages as buyers from the last two years bail out.
For the DOW I expect a rally to 12,200 and then a slide to11,600.
My two bobs worth.
Enjoy the ride
Tom Scollon
Chief Analyst |