Aussie Stocks Headed for Breakout, 4,700 Is Next Target

The Australian market has been trapped in an investment-numbing sideways trend for the past six months. The resistance level at 4,300 on the S&P ASX 200 has proved almost impossible to crack despite frequent attempts. The breakout above 4,300 is exceptionally important for two reasons.


First, when strong resistance is broken it means that long-term selling pressure has finally been overcome. The more powerful the resistance level, the more powerful the breakout. Think of it this way, the market has been overwhelmed again and again at 4,300. The strong breakout above 4,300, moving quickly to 4,346 shows that most of the potential bearish sellers at this level have now been cleaned out of the market. The next batch of sellers typically sits at a much higher level. The result is that the breakout has a clear run up to the next, often much higher, resistance level. Any pullback towards 4,300 is a good entry point for a strong rebound from this resistance level now acting as a support level.

The stronger and more prolonged the resistance level, the stronger it is as a support level when the level reverses its polarity from resistance to support. This is a major and significant trend breakout in the S&P ASX 200 .

The second important feature of this breakout is the context of the longer term pattern development. This provides an answer to the question of how high this breakout might go. The S&P ASX 200 has developed an up sloping triangle pattern. The base of the pattern starts in October 2011. The base is not clearly defined by a single rise over the usual 3 to 10 day period. In an index this is acceptable because the index aggregates the behavior of 200 stocks. For target calculation purposes we take the midpoint of this rise and use this to calculate the measured move.

This gives an upside target of 4,700. A word of caution: as it's taken six months for the pattern to develop, there is a high probability it could take about the same time for the pattern to achieve its target. This breakout is not necessarily a smooth and rapid rise to the target level. We are looking for a 4700 target, but that may be towards the end of 2012.

The next challenge is to define the rising trend as it develops. Our preferred analysis method for the trend uses the Guppy Multiple Moving Averages. Key confirmation of the sustainable trend break is when the lower edge of the long term GMMA moves above 4,300.

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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