S&P/ASX 200 (XJO) – wave 3 down is underway
In our last update on October 29, 2018 we discussed the likelihood of wave 5 down of a larger degree wave (1) bottoming at 5624 and expected a strong rebound in the short term being part of wave (2) up. A fast rally has unfolded over the past few weeks and our upside target of 5900 has been reached.
This level coincides with the 38.20% Fibonacci retracement ratio (measured from the August 2018 high of 6373 to the October 2018 low of 5624) and acted as a strong resistance. The magnitude of the rebound was weak as expected and shows that the market continues to be in a fragile state.
The RSI indicator kept facing resistance at 53.00% showing the momentum is weak and that the market is still in a correction mode. Wave (3) down started on November 3, 2018 and is currently underway.
A re-test of key support of 5624 is likely, which is an extremely important level to watch for two reasons:
- This level coincides with the 23.60% Fibonacci ratio measured from the March 2009 low of 3120 to the August 2018 high of 6373 and
- This is a key primary support.
A break below this level will be detrimental for the primary up trend which started in March 2009 and is likely to trigger further weakness to 5400 first (which is a dynamic support provided by the long term up trend line) but could potentially extend to the 38.20% Fibonacci ratio crossing at 5200.
Despite the current deep correction, the deterioration in the momentum conditions and being late in the cycle, so far the primary up trend structure still holds. Therefore, market bulls should monitor the magnitude of wave (3) down and hope it will truncate at 5624.
Crude Oil – second downside target reached
In our update on October 8, 2018 we discussed our concern about the marginally higher highs forming on the chart (showing that the primary up trend is getting tired) and the overbought nature of the commodity. On November 1, 2018 we highlighted the importance of support of US$63.40 and stressed that a break below it will trigger further weakness to $58.00.
A number of reasons (a glut of production in the U.S. and among members of the OPEC, a surprise softening of sanctions on Iranian oil, and Trump’s advocacy for lower energy prices) helped the selloff intensify over the past month and our downside target has now been reached. Oil lost 28% since its October 2018 high of US$76.90 and is considered to be in a bear market territory since the decline is greater than 20%. While more weakness could come in the months ahead, in the short term the price is likely to bounce.
The reason we think oil could rebound is:
- Wednesday’s price action declined to its December 2016 high where initial support is likely to hold.
- The RSI and the MACD indicators have reached oversold territory suggesting that the current decline is likely to be arrested soon.
The potential upside target is US$62.00.
GPT Group (GPT) – at key resistance
GPT has been trading in an up trend since March 2018 which appears to be approaching completion. The recent price action rebounded to a band of key resistance between $5.41 and $5.53 where initial selling pressure is likely to arise. The RSI and the MACD indicators have reached overbought territory pointing to a likely pull back in the short term.
Given the proximity to key resistance and the overbought momentum readings we are comfortable to trim positions.
Inghams (ING) – overbought
ING has been trading in a consistent up trend since May 2017 which is still technically intact. The rally accelerated over the past few weeks with Wednesday’s price action reaching a fresh all-time high of $4.54. The RSI and the MACD indicators have reached overbought territory suggesting that the price is likely to pull back in the short term.
The potential downside price target is $4.10.
Woolworths (WOW) – target reached
In our last update on September 14, 2018 we discussed the overbought nature Wesfarmers (WES) and the oversold readings of Woolworths (WOW) and recommended clients switch from WES into WOW.
Since our update WES declined from $50.73 to a low of $45.03 in early November 2018 (-11.20%), while WOW price rallied from $27.50 to $29.88 (+8.65%) and has reached our price target. The RSI and the MACD indicators reached overbought territory suggesting that the price is vulnerable to a pull back in the short term.
The initial downside price target is $28.40.
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