Are Aussie Stocks Headed for a Correction?

Sydney, Australia.

The steady rise of the Australian ASX 200 index has slowed and is developing the potential to turn into a downtrend. The fall below support near 4,980 has confirmed a change in the trend. This has the potential to develop into a technical correction.

A fall of less than 10 percent is called a technical trend correction so the underlying uptrend remains in place. A fall of more than 10 percent is a trend change. A 10 percent technical correction has a target near 4,644. This is an arithmetical calculation and has no relationship to support areas in the market. The nearest support level is near 4,560.

(Read More: Will Lady Luck Return to Australia This Year?)

The fall below 5,100 and the move below the uptrend line B signal a change in the market. Support near 4,980 has failed. The underlying uptrend is also weakening as shown by the narrowing of the spread in the long term Guppy Multiple Moving Average (GMMA). A weak rebound rally may develop but it does not come off a well formed base.

A rebound from the lower edge of the long term GMMA near 4,900 is bullish. A rebound from this level has resistance near 5,100. This is a long term historical resistance level. A move above 5,100 is capped by trend line B acting as a resistance barrier.

The ASX 200 developed a weak Relative Strength Indicator (RSI) divergence signal in early 2013. This occurs when the trend of the index makes new highs which are connected by an up sloping trend line. The corresponding peaks in the RSI are connected by a down sloping trend line. This is a RSI divergence signal. It gave early warnings of ASX 200 weakness.

The danger in this index is the downside bearish pressure. The problem with the fast rise starting in November is that no significant consolidation areas developed. This means there are no firm support areas to slow any fall in the market. The fall down could be as smooth as the rise, but it will happen more quickly.

There is a weak support level near 4,700. This is a minor consolidation and it has no historical significance on the chart. The strongest historical support level is near 4,560.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

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