Why the Recovery in Aussie Stocks Is Faltering

Australia's S&P/ASX 200 tock index has developed a remarkable recovery starting in June 2012. This was a classic Guppy Multiple Moving Averages trend breakout. It included three tests and retests of the long term group of moving averages.

This gave early warning of the change in investor sentiment so traders were ready to position themselves when the breakout was confirmed in July.

The upper trend line is an extension of the previous uptrend and this is now acting as a strong resistance level. The lower trend line defines the current trend breakout starting from July.

The fall below the lower trend line signals a significant change in the trend. This is the first break of this uptrend line. The retreat from the upper trend line confirms the strength of this line as a resistance level and this caps the rate of rise in the index.

The most important feature for a continuation of the uptrend is a rebound from support near 4,440. This is a weak support level based on the high in May 2012. Genuine support is near 4,400. This is also the lower edge of the long term GMMA.

This breakout was a good example of an extended stirrup pattern breakout. The stirrup pattern boosts the trader into a higher probability trend continuation after a major price retreat. We call them a stirrup pattern because like a stirrup on a saddle, they hang in mid air and help boost the rider into a higher seat.

The pattern starts with an upwards sloping triangle that forms at the bottom of a price retreat after a major uptrend. This triangle triggers a broader pattern development.

The stirrup pattern measures the distance between the previous trend high and the retreat low. This distance is then projected above the top of the trend high and sets a new target for the rebound breakout. The stirrup pattern signals a resumption of the pre-existing trend.

It is a continuation pattern, but it has the advantage of setting target highs. This makes it useful in establishing the risk and reward relationship in the proposed trade.

The trade has around 65 percent reliability, with typical returns between 20 percent and 30 percent. The Aussie index has delivered this result.

The key risk in this market is a fall below the lower edge of the long term GMMA. This will signal a change in the trend direction. Traders also watch for a head and shoulder pattern development. This is based around a rebound from the lower edge of the long term GMMA followed by a substantial retreat.

The main support feature is the old resistance level near 4,440. This will now act as a support level. This is also the value of the lower edge of the long term GMMA.

A fall below this level signals a collapse of the up trend. The key feature is the ability of the long term GMMA and the lower trend line to act as a support level. The upwards momentum is capped by the upper trend line acting as a resistance level.

Volatility remains the order of the day, and volatility management is essential for trade management.

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 CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.

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