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.