The next couple of days look could be important for the outlook on index markets.
The Australia 200 made a high at a significant Fibonacci cluster yesterday. A close under yesterday's low could set up for a decent decline.
The UK 100 is one of the most popular CFDs amongst our Australian clients. As well as being a major world market, the fact that it's active early in the evening makes it a good vehicle for Australian traders. It is currently testing the support of a major trend channel. As with the Australia 200, a break to the downside over coming days could be interesting.
Australia 200 Reversal Set Up
I posted a blog outlining a possible sell set up on the Australia 200 CFD on 5 October. This involved the potential for a "false break" of the well established resistance line, with price peaking at a Fibonacci cluster level around 4507/4526. You can read this post by Clicking Here.
As you can see from the chart below, yesterday's candle found this cluster zone. However, the set up has not been completed. It requires a trend peak to be made at this level. This won't happen unless there is now a candle that makes a lower high and a lower low.
If there is no trend peak at or near the cluster zone there is no set up. Also yesterday's high may not be the trend peak. One possibility is that we push a little higher over the next few days with a peak slightly above yesterday's high but still in the cluster zone or only slightly above it.
The entry trigger shown on the chart assumes we move below yesterday's low without moving above its high i.e. price now makes a lower high and a lower low. One approach to strategy is to wait for a close below yesterday's low before selling.
UK 100 Trend Channel
The first chart below is the weekly. I've used the fast stochastic here to get an idea of the big picture momentum on this index.
This supports the possibility that we could be in the early stages of a decent move lower. The clue here is that the stochastic has recently dropped out of the overbought zone above 80%. Not only that, it did so with a "Failure Swing" i.e. it made a lower peak and then took out the latest support. Put another way, the fast stochastic has started making lower lows and lower highs after being overbought.
This failure swing in the momentum osciillator may not be a good enough reason on its own to go short. But many traders see it as an encouraging sign when a failure swing in the higher time frame happens just before a possible trade set up in lower time frame charts.
The trend channel support shown on the daily chart has been respected 3 times. This increases the significance of a break below it.
Given the overall road map of this market, there is potential for quite a large move to the downside if the trend breaks. However, even if this turns out only to be a correction of the recennt rally, there is a reasonable possibility of a decline to the 38.2% retracement level or lower.
Shorter term traders looking only for a retracement may typically employ a fairly aggressive stop here (e.g. above the 40 day moving average - green line)
Longer term trend followers looking for larger moves would typically give the stop more width (e.g. above the last trend peak at around 5890)
With trend break strategies many traders will apply a filter, waiting for price to get decently clear of the trend line before selling to reduce the number of losses on false breaks