Is the Australian Stock market due a correction?

The Australian share market has been on a fantastic run over the last 8 weeks rallying over 500 points, and maintaining trade over the key level of 5000. Can the market continue to push higher? or will the new season bring a correction? In the last few weeks more and more companies have had failed attempts at new highs and technically the ASX 200 is at an interesting level.

If we study the ASX 200 chart below, a closer look reveals quite a number of reasons a possible correction could be due. In March of this year the market had been on a 6 month rally (A) before pulling back below the 5000 level. This had been the second decent rally the market had made and encouraging signs for a third and possible final rally to commence before a more major pullback. The third leg (B) in April/May however showed no signs of the previous two and barely made new highs before supply hit the market, and major institutions closed their positions. There was a distinct shortening of the upward thrust, and demand that had existed previously had now waned.

 

 In June this year the market corrected falling 600 points before demand stepped in at the 4600-4700 level prompting the current rally the market has experienced. The market had fallen quite quickly, tried to rally, re-tested the demand line and rejected before rallying higher. The volume increased as demand overcame supply. The accumulation was confirmed when we witnessed another 500 point rally during July and August.   

Since mid to late August we have witnessed two small pullbacks and the market is either not ready to continue higher or there is distribution taking place. We are currently testing the resistance levels from March and as expected volume has increased with supply present at this level. The current pattern looks very similar to that of June/July with price re-testing the supply line. There are currently two key levels to observe, one being the most recent high (reaction high), and the low before the high (reaction low). The reaction low is very important as this is where buyers or demand was strong enough to step in and make new highs. If this level is broken, the balance of power could shift to sellers. If we maintain support at the reaction low level, we could see new highs made and upside momentum continue.

The final reason we may see a correction is that the point and figure chart below suggests the accumulation that took place in June/July; with an upside projection of 5160 has been satisfied. We may need to see cause (re-accumulation or distribution) built up at this area before price can either continue higher or sell off.

 

 

The market is currently at a critical point and it is often best to wait and react to the market then try and predict, and it is most important to have confirmation before jumping in. The technicals are pointing towards a correction but as we know the market is unpredictable and always willing to prove us wrong. The sentiment is still bullish until the reaction low is broken and lack of demand for higher prices confirms the trend.

 

By Mathew McCullagh.