No Chart Surprises in ASX

The more cynical observers are suggesting it was no surprise that the Australian Government rejected a takeover of the Australian Stock Exchange from an Asian stock exchange. The rejection was also clear for many months on the chart of the ASX. The ASX chart in November 2010 showed this deal would fail.

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The ASX/SGX (Singapore Stock Exchange) deal failed and sent Australia on the way to becoming a financial market backwater. The deal was politically mismanaged by both the ASX and the SGX so its failure is not a surprise. It is a tremendous loss to Australia in many ways.

The Foreign Investment Review Board has sent a strong message to all potential foreign investors – go away. And that’s exactly what will happen. The sovereign risk premium for investment into Australia has just risen dramatically. The claim that the deal did not offer any benefits in terms of access to international capital or as an entree into Asia is regarded by many as arrant nonsense based on astounding ignorance.

The exchange combination would have created Asia Pacific's largest and the world's second-largest base of institutional investors with combined assets under management of over $2.3 trillion.

Unless you were short on the ASX, how did the chart of price activity give early warning of the virtual impossibility of the deal developing? There are four critical points of the chart that provided very early warning of failure.

The first was the announcement of the takeover. Forget for the moment the rather interesting rise in the ASX price in the weeks before the takeover announcement. This has some of the appearances of informed trading as the fast up move in September is well outside the parameters of the previously existing trend and was not driven by any particular set of news announcements in this period.

We traded the bullish flag pattern in October. This pattern develops on the suspicion of a major news event. The downsloping flag signals disillusionment as the news doesn’t develop as expected, and it is then followed by a strong breakout rally as the expected news is released. It’s one of the classic patterns of informed trading that we call aEarly Warning System Trading. The target level for the flag pattern breakout was $36.50, and this later became the support level for the retracement.

The terms of the takeover were an offer valued at around $48.00. On the day of the announcement the ASX price gapped up and surged to $43.89. This 25 percent increase from the previous days close at $34.96 failed to reach the level of the takeover offer at $48.00. More importantly, after reaching a high of $43.89 the ASX price continued to fall for the rest of the day, closing lower at $41.75.

In the first day of the announcement the ASX traded at a consistent discount to the takeover price. This is the first warning signal of failure. Usually we expect the price to rapidly rise to the takeover price and trade at a premium as investors buy in the belief that a second and more lucrative offer will follow. It’s standard takeover trading tactics.

The second warning signal, delivered in October 2010 within days of the announcement. The following day saw a significant retracement with further falls taking the price to a close at $37.05. Within two weeks the price had hit a low near $36.41 and then developed trading in a sideways pattern between $36.50 and $39.00. In terms of the reaction to takeover deals this can be described as a coffin pattern. The deal was all but dead and ASX trading entered a zombie regime, with twitches of life in February 2011.

The third confirmation signal that the deal would not succeed was the fall in March below the support level near $36.50. This, and the pattern of the small rally, confirmed the breakout from the sideways trading pattern and the placement of the downtrend line. It was just a matter of time waiting for the official death notice, leaked first by the Australian Treasurer Mr. Swan who was ‘inclined’ to kill the takeover, and later confirmed by the Australian Foreign Investment Review Board who did the official execution.

The final confirmation was the fast selloff on April 5 followed by a slow continuation of the downtrend towards support targets near $30.50.

Price activity on a chart tells the story, often long before the official announcement is made or the official confirmation received.

* Daryl Guppy holds open positions in ASX and SGX.

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

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