Technical Analysis: 24 January 2019

About the author:

Violeta Todorova
Author name:
By Violeta Todorova
Job title:
Senior Technical Analyst
Date posted:
24 January 2019, 2:11 PM

S&P 500 – at critical juncture

In our last update on December 21, 2018 we discussed the likelihood of a powerful rebound (potential wave 4-up) taking place in early January 2019. The S&P 500 has bottomed on December 26, 2018 and the index has been trading in upward trajectory over the past three weeks, retracing more than 50.00% of the decline which started back in October 2018. The current strength of the index came as no surprise.

We examined closely the rebounds which followed the first aggressive leg down in 2000 and 2007 and found that in 2000 the index retraced 50.00% of the decline and in 2007 the S&P 500 retraced almost 61.80% of the decline.

At present, the S&P 500 is sitting between its 50.00% and 61.80% Fibonacci retracement ratio (see chart below), which we consider a critical juncture which holds the answer to the key question if the current rally could be sustained and the index will continue to trade higher over the medium term or we will see a renewed selling pressure.

Leonardo Fibonacci discovered the infinite number sequence in the 13th century. One of the remarkable characteristics of this numerical sequence is that each number is approximately 1.618 times greater than the preceding number. This common relationship between every number in the series is the foundation of the common ratios used in retracement studies. Price tends to retrace 38.20% to 61.80% of the prior move before continuing in the same direction. For reasons that are unclear, these ratios seem to play an important role in the market, just as they do in nature, and can be used to determine critical points of reversals.

The key Fibonacci ratio is 61.80% and is also referred to as “the golden ration”. For the S&P 500 the golden ratio crosses at 2720. A break above 2720 will signal that the market is entering a consolidation phase and we can expect for the rest of 2019 the index to trade sideways between 2350 and 2940 (which is the bull case), before a sustained primary down trend takes place. If the S&P 500 fails to decisively break above 2720 we can expect a resumption of the selling pressure.

S&P/ASX 200 (XJO) – at critical resistance

In our last update on December 14, 2018 we discussed the likelihood of the index declining to 5400 and our downside target has almost been reached (the index dropped to 5410). A strong rebound has unfolded over the past three weeks and the current price action is close to a critical static resistance of 5942 (October/November 2018 highs) and 61.80% Fibonacci retracement crossing at 6010.

This band of resistance between 5942 and 6010 is critical for our market and we will monitor closely if the index will manage to push through or we will see a renewed selling pressure. Until we have a clarification and conviction about the long term outlook for our local and global markets our technical strategy will remain short term focused.

ANZ Banking Group (ANZ) – target reached

In our last update on December 13, 2018 we discussed the oversold nature of the stock and the likelihood of the price bouncing in the short term. The price rallied over the past three weeks and our price target of $26.50 has almost been reached earlier in the week (the price posted a high of $26.31).

The RSI and the stochastic indicators have reached overbought territory suggesting that the stock is vulnerable to a short term pull back.

PWR Holdings Limited (PWH) – short term weakness

PWH has been trading in a correction mode since October 2018 which is still technically intact. The current short term up swing has rebounded to its dynamic resistance of $3.70 where initial selling pressure is likely to arise.

The momentum conditions remain soft and the price is vulnerable to a short term pull back. The potential downside price target is $3.15.

Domino's Pizza (DMP) – close to target

On October 25, 2018 we discussed that resistance of $57.80 is strong and warned clients that the stock is vulnerable to a pull back. In our last update on December 14, 2018 we discussed that support of $38.11 is solid and highlighted that buying interest around that level is likely to arise.

The price declined to $38.10 from where a strong bounce has occurred over the past three weeks as expected and our upside price target of $46.00 has almost been reached. While at this point there is no clear sign that the up swing is over, the price is approaching a band of resistance between $47.50 and $50.00. Therefore, we are of the view that the short term upside from here is likely to be limited.

Over the medium term, we favour further consolidation and our view on the stock is neutral.

More information

Morgans clients can login to view all recent technical analysis on companies we cover by browsing the research section and filtering by 'technical analysis' in the Market Updates section. If you are interested in finding out more, please contact your nearest Morgans office.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents ("Morgans") do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

 

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