I'm worried. This is why:

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Almost two thirds of accounts with a position in the Australia 200 index are short. While some of these positions my be hedging long stock portfolios, outright shorts look dangerous to me. The reporting season underway is showing a positive earnings trend overall. Although only a quarter of the index stocks have reported so far, the across the board sales growth of around 2.25% is translating into earnings growth above 20% so far.

These could lead to upward earnings revision, and higher levels for the broad market.

Looking at the chart, I can see why many traders are short:

 

Australia 200 - daily

 

!*!*!

The index pierced the upper Bollinger band (black line), and fell back through. Some shorts may be looking for a return to the moving average (light blue line). This is one half of a BB trade signal. The other half is missing - the bands are NOT steady - they're widening.

Understanding what a technical indicator means is a great help in determining whether the current signal is useful. Given Bollinger bands are a map of the distribution of price moves, narrowing bands mean the volatility of close to close price changes is falling. The current signal is a result of the fall in volatility - in my opinion making it a much less reliable signal.

The index is near support at 5,127, and the fundamentals are supportive of a test of the year high at 5,250. Despite the BB position, I'd rather BUY this market than sell it.


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