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A technical look at the S&P/ASX 200 Index (August 09)

August 25th, 2009 · Greg Atkinson · No Comments

After yesterdays surge on the Australian stock market now is a good time to take in the big picture view and see what the charts may be telling us. It seems clear that the market is trending upwards but for how long will this rally last and can we learn anything from looking back at the S&P/ASX 200 over the last few years?

The stock market has now been trending upwards for 5 months and most major economic bodies such as the OECD and IMF all predict a return to global recovery (albeit at a sluggish pace) during 2010.  So this should mean stocks continue to rally right?

Actually for stock market investors things are now getting a little tricky because a lot of good news has already been priced into stocks and the market has also factored in that 2010 will be better for the economy than 2009. So in order to keep driving stocks upwards further signs of a global economic recovery will be needed, whereas any bad news is likely to send people scrambling to lock in some profits and push the stock market lower.

But rather than just focus on the short term view lets look at what has been happening over the last 10 years and see what they are telling us.

S&P/ASX 200 Index – 10 year Candlestick Chart. (quarterly over 10 years)


As with most long term ASX index related charts the bull market from 2003 till the end of 2007 can be clearly seen. It was indeed a good run for stock market investors and in hindsight we could say that the market pushed too far too quickly after hitting the 5000 level back in late 2005.

I know some people will jump up and down and say they saw the correction coming, but I recall reading predictions of a major stock market correction every year since early 2005 (and some before that) and since big corrections every decade are not unusual, it was only a matter of time before some bearish commentator go it right.

On the chart I have marked the three major upward trends since 2003. As you can see the first long term rally went from 2005 to early 2006 after which there was a correction, (shown in red) and then the market took off again on a steeper trend upwards. The most recent rally is the one we are experiencing now and it is pretty clear on this chart, that the trend upwards is comparatively steep and similar to the run up from 2006 to the end of 2007.

In my view the latest rally is simply the stock market coming back up to a reasonable level after the panicked selling following the collapse of Lehman Brothers in September 2008.  In other words, it is a correction upwards which is helped along by an improving global economic situation.

I have also marked on this chart the 5000 level simply as a reference point, as I imagine this level will be in the minds of many investors. (the 4500 level is also psychologically important but I feel it will be easily breached on the back of some good news from the U.S.)

The next long term chart worth looking at is the weekly candlestick chart for the ASX 200 since 2000.

S&P/ASX 200 Index – 10 year Candlestick Chart. (weekly over 10 years)


On this chart I have drawn a simple line that shows the overall trend between 2003 and late 2007. You can see how this trend became much steeper after the correction in 2006 (at which time many people were calling the top of the market) and this point is also around the 5000 level on the ASX 200 Index.

I have once again drawn a line at the 5000 level and also added a second line at around the 4800 as this is where I believe the Australian stock market in a recession should be trading at or around.  So I assume at this stage that it should be relatively easy for the Australian stock market to hit 4800, but with the Australian economy as it is now it will be difficult for stocks to rally much past 5000 for 2009.

Finally it is worthwhile to have a quick look at what has been happening since March by focusing on the daily movements on the ASX 200.

S&P/ASX 200 Index – Daily Candlestick Chart. (March to August 2009)


What this daily chart shows us is that the current rally has really been in two parts. First there was the push up from the low hit in March and then after some sideways movement, the rally picked up steam again in July. At present the market seems to be moving sideways a little despite yesterday’s rally where we saw the ASX 200 head up approximately 3%.

So my take on where we are now is that it seems likely the stock market will reach the 4800 level and maybe even nudge toward 5000, but at this point in time I cannot see stocks pushing higher much further than that. Some company earnings have been solid and reflect signs of a recovery, but plenty of other companies such as Qantas and Suncorp show that the economic downturn will still be felt for the rest of 2009 and probably well into 2010 also.

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