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 captures the shift from hope to fear, and it identifies which emotion is dominant. That is seen in sustained trading activity as currently shown with the United States indexes. But at times, chart patterns capture sustained points of indecision.
The Australian market index has two potential chart patterns — and both show prolonged indecision.
The challenge is to determine which chart pattern is the valid pattern because that affects 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 December, 2016. The lower edge of the trade band is near 5,660. The upper edge of the trading and is near 5,820.
Trading band patterns are used to set breakout targets. The width of the band is measured and the value is projected above and below the band. A break below the trading band has a target near 5,500. That target can be reached very rapidly as markets tend to fall more quickly than they rise.
An upside break has a target near 5,950, but it's getting much more difficult to achieve simply because of the prolonged period of market weakness in the sideways trading band.
With a bit of imagination, it's 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 far from a 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 a 50 percent probability either way.
Using the equilateral triangle, an upside break has target near 5,960 and a downside break has a target near 5,560. That 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 favor trading band analysis because the upside breakout in May, 2017 almost reached the trading and upside target of 5,820 before retreating. This is a rally-and-retreat trading environment with no clear market direction.
In many ways, it's an ideal market for the application of the ANTSSYS trading method, but there is not much comfort derived from either pattern analysis method. This is a weak market waiting for an external lead and that makes it exceptionally vulnerable to any external shock.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, which can be found at www.guppytraders.com. He is a regular guest on CNBC Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe. He is a special consultant to AxiCorp.