Equities and CFDs - A Market Technician’s View

Originally published by IG Markets

This week’s economic highlights

Aussie 200 index view

Aussie 200 weekly

Last week saw the index break through resistance at 5725 with a strong range. Look for support at the prior resistance level of 5725. A weekly close below this level would signal reversal. Financials remain the strong sector along with materials. A retest of the 6000 point level is now expected on current momentum.

S&P 500 weekly

The S&P 500 continues to develop a primary up trend following the support of 2220 not being breached. Currently, this short-term support of 2220 is clearly the inflection point on any price weakness. With data points in the first trading days supporting market strength, a test of 2300 is expected. Overall, a good weekly start to the US indices.

DOW yearly chart

This is not a prediction. The Dow Jones Industrial Average yearly chart now displays a five wave expansion pattern. Typical implication, this is a long range reversal pattern. This is something I am watching. This type of pattern can firstly retest point 3 and simply resume the higher trend movement. As yet there is no sell signal.

Short interest

Stocks are shorted for many reasons, including but not limited to “hedging” against a same sector equity long position. Or an outright belief the stock price will fall in the near future.

Some observations

Short interest can give an indication of the markets longer term view of an individual stock.

Myer Holdings Ltd (AX:MYR) remains highest short interest at 25%.

This week:

Aconex Ltd (AX:ACX) moves to 16%, falling from 19% last week, and remains at 16%.

It should be noted the resource sector currently has very small amounts of stock sold short:

• BHP Billiton Ltd (AX:BHP) less than 2%

• Fortescue Metals Group Ltd (AX:FMG) short interest has fallen from 9% to 4.7% to 3.1% currently

• Western Areas Ltd (AX:WSA) short interest continues to fall below 13%

Trade idea

The Elders Weekly chart shows a completed ascending pattern with the three lows in place. Last week’s price is a high range close. A close over $4.10 would be considered bullish. Major resistance at $4.30 remains.

The price target of $5.00 would prevail in this emerging trend.

Stop loss is set at $3.89.

See position sizing guidelines in this note.

Weekly chart of Bank Of Queensland Ltd. (AX:BOQ) shows the outside up close period immediately reversing the price action after a false break of the $10 level. With the current price action moving over resistance at $11.80, the new primary trend is emerging with a price target of $14.50.

Stop loss is set at $11.84.

See position sizing guidelines in this note.

Trade idea

S32 SHORT SELL

The weekly chart of South32 Ltd (AX:S32) has price bearish divergence showing in the highs set during December 2016. Currently the price structure looks to be setting a lower high at the $2.80 resistance level. With the RSI falling, further lower prices are expected.

Next price support at $2.40.

Stop loss is set at $2.89.

See position sizing guidelines in this note.

Trade idea

Long gold trade could be short lived

Gold remains in a primary down trend. The current move higher is part of the chart structure of the down trend with no evidence of anything other than a retest of the $1200 breakdown level underway.

Gold stocks are mirroring the gold chart moves and will be susceptible to reversal on the underlying commodity.

See position sizing guidelines in this note.

Last week’s trade ideas

ANZ weekly

Current recoveries underway in financials. The sector higher by 5% in 2016. These trends look set to continue.

ANZ has set up support and resistance levels to be respected. With the consolidation breakout and retest during September - November 2016, the current support level is holding up in early 2017 trade.

An overall price target of $34.28 with a stop loss set at $29.45.

See position sizing guidelines in this note.

TLS daily

Daily chart of Telstra Corporation Ltd. (AX:TLS) has the capitulation low showing into mid- November. The “V” rally has consolidated during December, this consolidation is important as a place where the sellers can reassert themselves, the break of the neckline and retest again shows buyers in control.

The breakout suggests a longer-term technical target of $5.41. Stop loss is set at $5.03. Overall, the primary trend is up.

See position sizing guidelines in this note.

ACX weekly

Daily chart of Aconex Ltd (AX:ACX) shows the broader down trend into the low of early December 2016. Recent price action shows a break of the long-term trend line and the relative strength indicator moving over the equilibrium level of 50, is showing price strength. The renewing trend shows a price target of $6.20 with a stop loss set at $4.80, this is the last consolidation area.

See position sizing guidelines in this note.

Position size and management guidelines

Position size by account size

Building a trading system on simple rules requires a money management process. As an example, should 1% of the account size be risked on an individual position, the position size can be calculated. Here is the guideline, this allows the trader to build an R- (risk) based return.

The distance-to-stop is the $ amount risk. Dividing the distance to stop into 1% of the account size gives the position size.

The lower stop displayed will have a smaller position size. Profit taken on the trade can then be measured against the risk.

For example:

The distance-to-stop is 20 cents and the account size is 10,000. Using 1% ($100) of the account, divide the $100 by 20c. This gives a position size of 500 units. The lower stop loss is 50 cents away. Using the same methodology of a 1% of account risk, the position size is 200 units.