In the search for more reliable trade signals, many traders combine fundamental and technical analysis. At the moment, these two trading tools are pointing in opposite directions. However, the four hour chart reveals that they may soon point in the same direction.
My concerns about the short term outlook for the Australian share market are on record. On a twelve month view, I'm bullish on Australian shares - China is stable, global growth is growing, regulatory risk in Australia is receding. Strong household balance sheets and low levels of leverage generally point to a sustainable rally into Q2 2014. It's just that in the short term the market has run ahead of itself.
At the moment, the index is trading on a trailing PE of around 23 times. Even allowing for a consensus 14% earnings uplift over the next year, that still means a PE around 19-20 times. Additionally, the index dividend yield has slipped below 4.25% - ok, but no longer compelling.
The problem for bears is that the daily chart shows a clear uptrend in the Australia 200 index. Turning to a shorter time frame, there is a technical case that the rally may be unraveling:
Australia 200 index - 4 hourly
There is a possible head and shoulders reversal forming here. If the current rally takes the index through 5,280-85, the scenario is invalid. If the market fails below that point, and heads back towards 5,225, the formation is close to complete. Any drop through 5,225 could spark technical selling.
One of the problems with putting market calls on the record is an inclination to defend them. This is the opposite of what many good traders do - listen carefully to what the markets is saying. Given my bias, I can't decide if I'm simply searching for evidence to support my view, or if this is a genuine set up.
What do you think?