Australia's benchmark index is poised for further gains, analysis show

Key Points
  • The technical near-term target for S&P/ASX 200 is 6,100, according to analyst Daryl Guppy
  • The rise above 5,960 for the index was a key event

Australia's benchmark index, the S&P/ASX 200, has finally broken out from the prolonged trading band which had dominated the market for more than a year.

A man looks at the main board of the Australian Securities Exchange ASX.
Daniel Munoz | Getty Images

The breakout above 5,800 was very strong. It started with a rally and was followed by a short period of sideways consolidation around 5,920.

Although the media is focused on 6,000 as the breakout level, the level of technical importance is 5,960. This has been a long-term resistance level so the decisive breakout above this level is significant.

The sideways pattern consisted of two parts, an upper trading band and a lower trading band.

The market was stuck in the lower trading band between 5,660 and 5,810 for more than a year. The upper part of the trading band between 5,810 and 5,960 dominated the market for several months in early 2017. Those two trading bands provide a guide for setting the breakout targets.

The width of the trading band is measured and projected upwards. This gives a target near 6,100. This is below the very long-term resistance target near 6,400, which was established in 2007.

Guppy chart 171108 Asia 

How reliable is this breakout?

Analysis using the Guppy Multiple Moving Average (GMMA) indicator can assist in answering the question. The short-term GMMA group of averages provides a guide to the way investors are thinking.

This group is well separated suggesting the rally and the breakout trend are enjoying strong support from investors.

This is further confirmed by the way the index is hugging the upper edge of the short-term GMMA. This is bullish, but carries with it a warning about the potential for sudden reversals. This is a strong-trend breakout that has moved well above the support offered by the long-term GMMA. This means the market can fall substantially and still remain in an uptrend.

The long-term group of averages provides an insight into the thinking of investors. This group is now very confident and this is shown by the wide degree of separation in this long-term group of averages. This is characteristic of a well-supported trend as it shows investors enter the market as buyers in all market conditions.

The third feature is the degree of separation between the two groups of moving averages. This is a steady separation and this is characteristic of a sustainable uptrend.

The danger in this trend pattern behavior is the potential for a substantial pullback toward 5,860 and the upper level of the long-term GMMA. This would be a trend correction and not a trend change, but such a correction would reduce profits.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, which can be found at 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.