Australia's S&P/ASX 200 Index is digging itself out of a hole. The market was down as much as 16% on year in April. But thankfully, the surge in commodity prices has created a hot rock effect, increasing the market heat and driving shares higher towards a new trend. As of Wednesday's close, the Australian market was down 8% for the year.
The rebound started in March 2008 and was confirmed as a sustainable uptrend by subsequent rebounds in April. The key resistance area at 5,650, provided a barrier for rally 1 and 2.
The rally 3 retreat used the trend line and the upper edge of the long-term Guppy Multiple Moving Averages (GMMA) as the rebound point. Traders who were uncertain of the trend strength used this rebound as an entry signal.
While everyone is focussed on 6,000 as an important resistance level, this has more to do with a fondness for round numbers than with the reality of support and resistance.
The most significant resistance barrier is near 6,150. This provided strong support levels throughout the sideways movement in early 2007, and again in September and December. It was the fall below this level in December 2007 that confirmed the strength of the downtrend. This makes the 6,150 level very significant in terms of resistance. A break above this level quickly encounters resistance near 6,400.
This is an unusual trend. The short term GMMA captures the inferred activity of traders. Usually we see a repeated pattern of expansion and compression in this group of averages. It shows that traders are actively trading – buying and selling to capture short-term profits.
This is not shown in the current trend behavior. Traders entered the market in strength in late April and have remained consistent buyers. Any trading selloff is shown by a compression in the short-term GMMA. This has not happened, and it suggests an exceptionally high level of confidence.
This is not matched by aggressive investor behavior. As a trend accelerates the long-term GMMA quickly expands as investors confirm the trend behavior. The area at point 4 is an example of this behavior.
Despite strong rallies at point 1, 2 and 3, the chart does not show a strong expansion of the long-term GMMA. This suggests investors are more cautious than traders. This creates a small warning in terms of the strength of the developing trend.
Focus on 6,000 ... Or Not
While media eyes are fixed on 6,000, and chart traders are fixed in 6,150, we must be aware of the support areas. Long term support is near 5,650. There is some minor support consolidation near 5,760 but this has no long term historical significance. It is a product of recent volatility behavior. This lack of long-term historical support adds an edge of vulnerability to the trend.
Any trend retreat will probe for support – and it's a long way below current index values. The first support level is provided by the value of the lower edge of the short-term GMMA. This is near 5,776. This is support for the normal volatility within the trend and not a major support figure.
The next strongest support level is the value of the trend line that is used to define the current uptrend. This is currently near 5,700 and close to the upper value of the long-term GMMA. The trend line is a guide to trend development. It may act as a support level.
The strength of support increases over time. A trend line that has been in place for three months is not as reliable as a trend line that has been in place for 6 months or a year.
A retreat from the current index levels finds reliable long term support at 5,650. This lack of consolidation on support between 5,650 and 6,150 is the note of caution in this market. It's an outside chance but traders cannot ignore it completely.
Trend strength defined by traders is currently exceptionally strong. Historically this consistent degree of separation in the short-term group persists for around 8 to 10 weeks. Projecting this trend forward at its current rate shows an encounter with resistance towards the end of June or about 8 weeks after this strong short-term GMMA relationship developed.
October 2006, March 2007 and October 2007 show the strength of reaction when these trader-driven trends retreat. Traders will be alert for weakness as the market nears the resistance level near 6,150.
If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.
CNBC assumes no responsibility for any losses, damages or liability whatsoever suffered or incurred by any person, resulting from or attributable to the use of the information published on this site. User is using this information at his/her sole risk.