Originally published by Guppytraders.com
Chart patterns are an essential part of market analysis because they provide a guide to how market participants are thinking. At heart the financial market is a measure of the psychology of its participants. It capture the shift from hope to fear and identifies which emotion is dominant. This is seen in sustained trading activity as currently shown with the US indexes. But at times these chart patterns capture sustained points 09 of indecision.
The Australian market index has two potential chart patterns. Both show prolonged indecision. The challenge is to determine which chart pattern is the valid pattern because this effects the way upper and lower index breakout targets are established.
The first pattern interpretation identifies the prolonged sideways trading band that has dominated the Australian market since 2016 December. The lower edge of the trade band is near 5660. The upper edge of the trading and is near 5820.
Trading band patterns are used to set breakout targets. The width of the and is measured and the value projected above and below the band. A break below this trading band has a target near 5500. This target can be reached very rapidly as markets trend to fall more quickly than they rise. An upside break has a target near 5950 but getting is much more difficult to achieve simply because of the prolonged period of market weakness in the sideways trading band..
With a bit of imagination its possible to plot an equilateral triangle pattern on the Australian market index. We say imagination because the lower trend line in particular has to exclude some dips. The upper trend line includes an extended series of peaks that are well below the trend line. It’s a far from perfect equilateral triangle. An equilateral triangle has equal degrees of slope on both the upper and lower trend lines.
However, the key message of the potential equilateral triangle pattern is one of indecision. The market may break to the upside or to the downside. It’s 50% probability either way. Using the equilateral triangle an upside break has target near 5960 and a downside break a target near 5560. This simply supports the conclusion derived from the trading band analysis. This is a sideways market where the key trigger for a trend change is a move above or below the trading band.
We favour trading band analysis because the upside breakout in 2017 May almost reached the trading and upside target of 5820 before retreating. This validates the use of trade band analysis. This is rally and retreat trading environment with no clear market direction. In many ways its an ideal market for the application of the ANTSSYS trading method. There is no much comfort derived from either pattern analysis method. This is a weak market waiting for an external lead and this makes it exceptionally vulnerable to any external shock.
Daryl Guppy is a leading international financial technical analysis expert and special consultant to Axicorp. Guppy appears regularly on CNBC Asia and is known as "The Chart Man". Disclaimer: Daryl Guppy is not a financial advisor. These notes are for educational purposes only and provide an example of applied technical analysis.