The Dow Jones industrial average offers rally-and-retreat trading opportunities between 16,000 points and 18,290, chart analysis shows. » Read More
The long, steady decline of the Australian dollar – and the Australian economy – continues.
After months of sitting on the ledge of the valley of death, hovering near $0.715, it's been given a push over the edge by concerns over China's growth, and given a kick on the way down by the continued fall in commodity prices, including oil, gas and iron ore.
So, just how low can this negative sentiment, coupled with relentlessly negative Reserve Bank of Australia jawboning, send the Aussie?
The prolonged, steady downtrend in the currency is well defined using a Guppy Multiple Moving Average (GMMA) indicator.
The long-term GMMA is well-separated, showing consistent investor selling into the rallies.
The Dow Jones industrial average has developed a strong and powerful reversal pattern, which means previous bullish analysis must be revised.
The dominant pattern on the Dow is a long-term head-and-shoulder pattern that is best seen on a weekly chart. This pattern is overlaid on the longer-term trading band pattern that has defined the rise of the Dow that started in 2011.
Picture this: the market plunged 9 percent in around 30 minutes of hectic trading. Regulators raced to contain the damage, that was estimated in the trillions. Later, the plunge was repeated with a market collapse of 6.5 percent as 1,100 points were wiped in about five minutes. Trading was halted multiple times and circuit breakers were praised for preventing a full-on market crash of epic proportions.
It just goes to show that this is an untrustworthy, poorly developed market that has to be managed externally by imposing trading halts.
Hang on, there's just one problem with this assumption. The 9 percent plunge happened on May 6, 2010. It was the infamous Flash Crash on the New York Stock Exchange. The second 6.5 percent fall was the August 24, 2015 flash crash, also on the NYSE.
And rather than signaling the end of the financial world as we know it, markets simply shrugged their collective shoulders and moved on.
But analysts seem to apply a different yardstick to the China market and are using this week's Shanghai Composite flash crash to highlight what they see as China's economic disaster.
History is repeating itself on Nymex, and although $10 oil looks a long shot, technical analysis indicates that prices have further to fall.
The weekly Nymex crude oil futures chart shows a repeat of the downtrend behavior that has characterized the oil price since the collapse began in 2014 September, with the fall below critical support at $38 a gap down from the previous weekly close of $39.94.
These dramatic gap-down moves have been a feature of the oil price collapse, and usually they signal a very fast fall to the next support level.
Meanwhile, the fall below $38 has invalidated the bullish consolidation pattern that appeared to develop from March to October. This pattern failed to develop.
Some analysts have suggested $10 is the downside target for oil. The charts suggest a fall to this price level is a low probability. But the fall below critical support near $38 does change the nature of the oil price behavior.
The ECB decision added rocket fuel to the rally in the EuroDollar from $1.06 to $1.08. The ANTSSYS trading method captured both the initial up move and the application of the traders ATR kept the trade open. But is this rally sustainable or is it just a blip in the downtrend environment?
The answer to these questions is contained in the two significant chart features for the Euro dollar.
Trading the Australian dollar was a classic play for those who didn't have direct access to China, and a sure-fire winner on the short side as the Chinese economy slowed.
The decline in the AUD reflected not just China's economic slowdown,but also the fundamental weaknesses in the structure of the Australian economy. It was ironic that those who criticized China for its over-dependence on exports fell into the very same trap.
The inclusion of the Yuan into the International Monetary Fund's Special Drawing Rights (SDR) basket of currencies adds further down pressure on the Aussie. Why trade the AUD when you can trade the yuan directly without the complications of using a third-party currency as a proxy?
A month ago we looked at NYMEX oil and anticipated the development of an inverted head-and -shoulder pattern on the chart, and noted that if this pattern developed it would signal a downtrend reversal.
At the time, we specified the type of future price activity that would confirm the inverted head-and-shoulder pattern. Three future features were needed for confirmation: The first was a continuation of the rally with a move above $48 towards historical resistance near $58, the second a rally collapse and a retest of the $48 area as a support area, and third was another rally away from support near $48 and a move above resistance near $58.
This activity has failed to develop and there is now a low probability this pattern will be completed.
Traders were alert for the development of patterns that would signal the end of the downtrend. But now traders need to be alert for behavior that signals a continuation of the downtrend with a downside target near $28.
The euro-dollar chart shows the consequences of a failed triangle breakout.
The euro-dollar developed an end-of-downtrend pattern starting in March 2015. The pattern was defined by a strong resistance level near $1.14 and the up-sloping trend line B, a combination that created an up-sloping triangle pattern.
The up-sloping triangle pattern is usually associated with an upside breakout. So, as the price activity approached the apex of the triangle, traders were preparing for an upside breakout.
The Shanghai Composite index's breakout move above its long -term resistance near 3,400 signaled a bullish uptrend.
This is part of a longer- term up trend breakout, with a target of 3,800. The longer term upside target is 4,200 but expect consolidation behavior near 3,800.
The breakout is a logical development of the chart pattern and the structure of the Shanghai Index. The Shanghai index breakout from the equilateral triangle pattern is bullish and had a long- term upside target near 3,600. Now this target has been achieved, the market will move towards the longer term historical resistance level.
After a retreat of around 12 percent, the Nasdaq has rebounded strongly from the long-term uptrend support line and is moving to retest the upside target near 5,200 points.
This is the second time the Nasdaq has moved towards the 5200 technical target and many investors are worried that these new highs signal the end of the uptrend. This is where chart analysis is invaluable.
Chart analysis gives investors a method to decide if the rally towards 5,200 is a buying opportunity or a sell signal.
In 2000, the rise of 247 percent from 1,475 to 5,132 over seven months was unsustainable. The Nasdaq trend was almost vertical from November 1999 until the crash in March 2000.
This time, the index's behavior is different.
Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.