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IG Markets Afternoon thoughts

Across Asia, regional markets have started the new trading week mostly higher following Friday’s positive session on Wall Street and after Japanese GDP slowed much less-than-expected. The Hang Seng is the top performer, up 2.1% while the Nikkei 225 and Shanghai Composite are both up more than 0.2%. However, the Kospi is seeing some profit taking, currently down 1.3%.

In Australia, the ASX 200 is currently 19% firmer at 4251, just off its intraday high of 4258. With US markets closing last week with consecutive days of gains, on reduced volatility, a sense of normalcy is returning to global equity markets. This in turn is seeing investors buying with more confidence and assuredness than what was evident last week. As a result of this relative calmness, gains for the day are broad based with the heavyweight materials, energy and industrial sectors advancing more than 2%. The financial sector, while trading higher, is a relative underperformer with a gain of 1.1%.

It looks like rational thinking is starting to return to the local market after last week’s very irrational trade saw massive swings. Having said that, it all stemmed from what was happening in overseas markets so we’re still expecting participants to remain nervous and volatility elevated when offshore trade resumes this evening.

Hopefully this trend continues but we must remember how quickly this fear and panic driven selling can re-emerge. There were plenty of false starts during the GFC!

No one really knows whether or not we’ve seen the worst of the selling. What we do know, however it that the fundamental reasons behind the selloff are largely still present; Europe is still a basket case and US economic growth is slowing.

From a technical perspective, the candlestick pattern that was formed by last week’s price action, a bullish ‘hammer’ reversal pattern frequently marks major lows. The huge weekly range and volume make it even more potent. However, we think it’s worth revisiting a very similar pattern that formed in early 2008.

The week of January 21, 2008 saw the ASX 200 enter a technical bear market (just like last week). Price action for the week printed an almost identical ‘hammer’ reversal pattern that we saw last week, with the weekly range of 13% only 1% bigger than last weeks. Despite a brief move higher and a failed break to new lows in between, it wasn’t until five months later that the market finally moved convincingly lower.

From this, we need to realise that we are far from out of the woods yet and that it is highly likely we’ll see failed bear market rallies before we finally begin a sustainable move higher. Watching the price action will be the key; we need to see the market form a higher low, followed by a higher high before becoming too bullish. Remember that just because stocks are screamingly cheap does not mean they are not going lower.

Ben Potter
Market Strategist
IG Markets

ENDS

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