Since June last year, we've become used to a pattern of relatively shallow corrections in the Australia 200. It's been just over a year since we've seen a red candle as big as this week's. The last was the week of 13 May 2012.
Looking at the weekly chart for Australia 200, there looks to be a decent case to say that we've started a correction of the rally that began last June. Based on this chart interpretation, my bias for a while will be towards selling rallies in the index rather than buying dips.
The clues that suggest this correction has further to go are as I see it:
- We have overlapped below the old resistance marked "3" after what looks like a 5 swing advance beginning in June last year.
- Corrections of like this have a good chance of retracing at least 38.2%
- The uptrend got well above both its 40 week (200 day) moving average and longer term trend line. When a major correction does eventually get under way, there is a reasonable chance of the market returning to these longer term supports
- The momentum is now clearly down with the slow stochastic dropping out of the overbought zone (see arrow in box below chart)
Looking for support targets, the 4750/4800 zone has a bit going for it. This would find the 40 week moving average and trend line as well as being a 38.2% retracement. This is actually only about 4% below today's levels and would fit with the scenario of a relatively modest correction in this low interest environment.
If something more serious happens to change the market outlook, we may have to wait for the current downtrend to develop more structure and provide more clues about a possible ending point. At this early stage though, the 4450 area is a candidate, combining old resistance with the 61.8% retracement level.
Traders interested in candlestick patterns will have seen that we had a Tweezer Pattern going on in the pas couple of weeks. This is where you get at least a couple of candles next to each other with the same high. Tweezers are often seen as a 2nd order candlestick pattern but they can be at their best with weekly or monthly charts. The chances of having the same high for 3 weeks in a row are lower and so the Tweezer is more likely to suggest a resistance zone.