Although I do not trade stocks based on technical analysis I do often look at stock market technical charts to simply see if they might be indicating a trend. Of course there is no guarantee any trend shown in these charts will continue, but a quick look at some candlesticks charts of the All Ordinaries Index does reveal a few interesting patterns.
At this point I should mention that I am not intending to get into a detailed explanation of candlestick charting, but for those who are interested Investopedia has quite a good overview of the The Art of Candlestick Charting which I think is well worth reading.
For the purposes of my simple analysis I am just looking to see if the All Ords closed higher during a certain period (shown in blue) or if they closed lower. I am not attempting to predict exactly where the market is heading next week or pretend I can see into the future.
As I often mention any person can make vague stock market predictions and claim to be correct simply because the market are rarely still for very long. Stock prices move up and down even during bull market runs and we can see this quite clearly by looking at the ASX All Ords candlestick chart over 20 years.
ASX All Ordinaries 20 Year Candlestick Chart
What is fairly obvious from this chart is the following:
- Normally the months where the market is up (blue) and down (red) are spread without any real pattern although the All Ords has headed upwards over 20 years so the increases overall have been more than the decreases. Therefore if you say that the market might have a short term correction up or down it is hard to be wrong!
- The commodities induced boom is easy to spot. From 2003 the All Ordinaries entered a major bull market run and the up months were a lot more frequent than the down months.
- The stock market rout was sudden and sharp. From around end of 2007 the All Ords closed lower most of the time, but over the last few months the stock market has be creeping back up and the downwards trends has been broken.
I have drawn a very crude line just to show that at the moment the stock market seems to be creeping back to the approximate 20 year trend. Could we be at the start of another bull market run like we saw from 2003 or will the market plunge down again? Maybe another commodities fuelled boom is too much to ask for but I do think the long term trend for a while will at least be up.
The bull market from 2003 and the fall back to earth from late 2007 is even easier to spot if we look at the where the All Ordinaries closed each quarter over the last 10 years as per the chart below.
ASX All Ordinaries 10 Year Candlestick Chart
In hindsight we can see how the stock market pushed higher and was really heading for the heavens before falling into a heap. Note how big the falls in 2008 were compared to the rises in the previous years. It took around four and half years to move from 3000 to over 6500 but just over one year to fall back to near 3000 again. Ouch!
To get a better idea of what has been happening over the last few years I will use candlestick charts covering the All Ordinaries for the last 4 years.
ASX All Ordinaries 4 Year Candlestick Chart (Monthly)
On this chart I have highlighted a few points of interest:
- The trend up towards to market high in 2007 was in two main bursts. I have also marked on the chart the periods were the market moved a little sideways for a while in mid 2006 and again mid 2007. The end of financial year is one reason markets tend to be a little flat around this time of year. This may happen again this year.
- In March 2008 and then again in August there were some signs that the market may have bottomed. However the failure of Lehman Brothers wiped out any remaining optimism for the year.
- The “bounce” off the low reached in March 2009 can be seen and what is interesting to note is the market has closed higher at the end of each month now since March. It is not exactly anything to get excited about yet, but it is a promising trend.
If we look at the same 4 year period again but this time focus on the weekly movements of the All Ords Index (see chart below) we see that the Australian stock market fell back towards 3000 in 3 major phases and that there were actually quite a few weeks when the market tried to claw back some ground.
ASX All Ordinaries 4 Year Candlestick Chart (Weekly)
From August 2007 the weekly movements of the All Ords started to become larger as market volatility increased but over the last few months the weekly changes have become smaller. Again it is too early to read too much into this but it does indicate at this stage that the market is starting to settle down.
This chart also shows that although the market has been heading up since March there has still been plenty of down weeks. This is not uncommon but the overall trend at this stage is up although we may very well see the market move sideways for a while during the move into the new financial year.
It is always dangerous to read too much into charts but as the weeks pass I become more optimistic about the rest of 2009. We are starting to see further signs of recovery in the global economy and the All Ordinaries Index is reflecting this. So although 2009 might be a tough one for the Australian economy the chances are that the stock market will fare much better this year than last. Let’s hope so!