A drop in commodity prices and waning demand from China pushed the Australian dollar to fresh lows, and now the currency faces a test of key support.» Read More
The Shanghai Composite Index has developed an astounding rally breakout in the past week, rallying more than 6 percent to hit levels not seen since December, and bringing gains to more than 10 percent from year-lows reached in March.
But, chart analysis shows this rally breakout may not be sustainable. Here's why.
The breakout rally developed within the context of an up sloping triangle pattern. The triangle pattern is a long term bullish pattern developing over three months. The triangle pattern is created by the combination of the support resistance level near 2,060 and the up sloping trend line. This up sloping trend line starts from the low of 1,991 made on May 21. The second anchor point for the uptrend line is the open at 2,013 on June 20. The third anchor point of the uptrend line is the low of 2,018 on June 25. The fourth important anchor point is the low of 2033 on July 11.
Gold prices have seen a rebound in recent weeks after hitting a four-month low in June and technical analysis suggests there is potential for this rally to develop into a genuine trend breakout.
The key feature of the weekly Comex gold chart is the downtrend line. This starts from the high near $1,799 notched in October 2012. Most recently the line uses the high of $1,392 in March 2014 as a confirming anchor point for the downtrend line. The current breakout above the trend line has the potential to develop into a genuine trend break, and here are three reasons why.
The DOW closed above 17,000 for the first time in early July on the back of a strong U.S. jobs report. Sturdy upward momentum has seen the index post a series of fresh all-time highs this year but charts suggest momentum may be set to slow.
A few months ago we suggested the DOW had an upside target of 17,000. This target has been achieved, marking a continuation of an exceptional uptrend but chart analysis suggests this upward momentum may slow and consolidation may develop around the value of the uptrend line.
The strategic trend and the significant feature of the DOW is the up-sloping trading channel defined by three trend lines. The upper trend line is trend-line C; this will provide support for the DOW as it retreats from 17,000.
Trend-line A forms the middle core of the pattern and is the most well-defined trend line. It starts in February 2011, acted as a resistance in July 2011, and again in April and September 2012 before the DOW broke above this level in February 2013. Starting from February 2013 trend-line A has acted as a support level. The general market environment has been bullish with the DOW staying above trend-line A. The breakout above trend-line C in January 2014 was an unsustainable rally.
Indonesia heads to the polls to elect a new president this week and while the outcome looks less certain that it did a few weeks ago charts suggest that stocks are poised to resume their uptrend.
Joko "Jokowi" Widodo, the popular governor of Jakarta, remains the frontrunner to win Wednesday's vote but his poll lead has narrowed sharply in recent weeks and the possibility of a win by rival ex-general Prabowo Subianto is not being ruled out.
The Jakarta Composite Index chart is defined by three levels of historical support and resistance. These levels help set the boundaries for any moves following the Indonesian election. As the election has become more closely contested there has been a reduction in trend strength.
The key resistance level is near 5150, which the most recent uptrend failed to reach. Any rebound following the election results will find resistance between 5100 and 5150.
The Australian dollar has been stubbornly strong this year despite slowing growth in China and Australian policymakers' attempts to talk down the currency and charts indicate it's set to strengthen further.
The AUD/USD has been hammering out a bottom near $0.88. The August 2013 rebound from this area saw a rapid climb towards $0.98 prior to the retreat and retest of support near $0.88. The rally rebound from near $0.88 that began in February 2014 has found solid resistance near $0.94.
The rally in COMEX gold prices from $1,250 has gold bulls excited. After more than 2 years of falling prices is this finally the turnaround that gold bulls have been hoping for?
The gold chart doesn't give a clear answer but it sets key trigger points that allow traders to make a better decision. Let's start with the bearish view and look at features that suggest the rally is temporary and the downtrend will likely continue. There are three resistance features that can limit the rally.
The first is the value of the long-term downtrend line. The current value is near $1,320. The second is the value of the long-term Guppy Multiple Moving Average (GMMA). The upper edge of the long-term GMMA is near $1,350; this also acts as resistance. The third is near $1,390; gold developed a strong resistance near this level in September 2013 and March 2014.
Together these features suggest that the downtrend remains strong. The long-term group of averages in the GMMA indicator is well separated, while the long-term group of averages continues to move lower and does not show signs of compression.
Iraq's sudden fall into the hands of extremists has the market talking about extremes in oil prices. Extreme may be too strong a word, but there is slightly more bullish pressure than there was around at the time of the last oil crisis.
Developments in Ukraine and the annexation of Crimea had the potential to effect oil and energy supplies in Europe but failed to do so. While the Ukraine crisis accelerated the rally in NYMEX oil that started in the week of January 18, 2014, it was a short-term rally in the environment of a slow longer-term uptrend. The current Iraq-driven rally has a similar nature but is starting from a higher base.
Trend line A on the weekly NYMEX oil chart shows an uptrend starting June 2012. This trend line connects the lows in November 2012 and April 2013. This is the underlying secular trend, located within the context of well-defined trading bands.
The weekly NYMEX oil chart shows four levels of support and resistance that define the trading bands: $78, $88, $98 and $110.
A trend change is at hand for the euro-dollar after the European Central Bank exceeded the market's easing expectations last week by imposing a negative interest rate on banks for their deposits and cutting its main interest rate from 0.25 percent to 0.15 percent.
Chart patterns are not infallible – they're used to identify the balance of probability of one possible result compared with another. In late May, the euro-dollar chart showed a steady uptrend with a well-defined uptrend line. However, this uptrend line was broken as the market anticipated ECB policy easing.
The bullish analysis we compiled in May was not confirmed by market activity. The break below the uptrend line was the critical signal and we adjusted our analysis accordingly. This week we update the chart analysis.
There are two significant features on the weekly chart: trend line A and historical support near $1.34.
Narendra Modi's landslide victory in India's elections spurred hopes that Asia's third-largest economy would soon see growth-supportive policies. Stocks rose sharply in the run-up to the elections and while post-election sentiment may see stocks rise further charts indicate that a quick retracement is possible.
In March 2014 the NIFTY 50 broke decisively above 6350, which had been a major resistance level since January 2008. It was previously tested in November 2010, and more recently acted as a strong resistance level from November 2013 to January 2014.
The NIFTY had formed a very wide trading band with support located near 4650. Support was tested in December 2009, February 2010 and again in December 2011. The width of the trading band is measured and this measurement is projected upwards to give a breakout target near 8000.
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The key concern is the nature of the breakout. The NIFTY has developed a parabolic trend. These trends are found most frequently in bull markets, or markets showing volatile rebounds. While parabolic trends are usually seen in fast-moving stocks, they are also present in fast-moving index areas or markets.
Parabolic trends are best described using an arc, or a segment of an ellipse. They start slowly then accelerate very rapidly until activity on the price chart is almost vertical. They cannot be adequately described by straight edge trend lines; instead the price action uses a parabolic curve as a support level.
A weaker yen and positive economic indicators have pushed Japan's Nikkei to one-month highs but with the index well below its 2013 peak charts indicate the market is poised to fall.
The Nikkei has developed a downtrend – trend line A which developed near the 16,232 high in December 2013 – and is testing support near 14,000.
This is a long-term trend reversal pattern that uses uptrend line B as resistance. Uptrend line B defined the uptrend starting in April 2013 and acted as support until January 2014. The Nikkei's fall below this trend line signaled a change in the uptrend, thus uptrend line B acted as resistance after January 2014, capping the index's rebound rise near 15,500.
The rebound and retreat pattern confirmed the location of downtrend line A. A breakout above downtrend line A would be bullish; however this appears to be a low probability event. Any breakout has resistance near 14,800.
Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.