February 8

Market Update for Thu 8 Feb 2018

Markets rebounded but remain on the soft side on Tuesday. The strong up move in most global equity markets from the November 2016 US election selloff didn’t have any meaningful pullback or correction in 2017. Global equity markets than even surged up in January 2018 and now crashed down early February 2018. This corrective move can be viewed as ‘normal’ within this larger context. However, average volatility might increase and magnitudes of bounces and pullbacks becoming larger before a final price top sometimes in the future can be observed.

XJO bounced at the open but residual supply gave back more than half of the initial gains. Volume remains above average which confirms the presence of supply. Prices stated pulling back after they hit 5925 resistance, a level we introduced in yesterday’s report. This level needs to be recovered to ease from further downside pressure. The next level of resistance is the psychologically important round number 6000 and then 6090, the level which prices failed to break above for the selloff to unfold. The Chart-of-the-Day shows a Daily chart of the S&P/ASX-200 (XJO) price index. Prices are bouncing from the demand line of the uptrend channel from the February 2016 washout low. For now, this keeps the door open for the long-term uptrend to continue. Also, prices are holding 5805 support from where the price index broke above in October 2017 after the May to October 2017 trading range. This keeps the door open for more gains. However, today’s bounce looks feeble in the view of the previous two days of selling. More, much more needs to be done to improve the current negative technical picture. Market Condition is in Stage 2. A Weekly close below 5850 on Friday would require a further downgrade to a Stage 3 on the Weekly timeframe entering a confirmed downtrend, the first since June 2015.

The NH-NL Index remains negative but recovered on New Lows contracting back to more normal levels. New Highs remain at the very low level. The Daily NH-NL indices are all below their zero line but back in their neutral zone. The down spikes in the Daily NH-NL indices give a message for a short-term bottom in the market. The Weekly NH-NL index dropped below its zero line Intraweek. However, this level needs to be confirmed by the close on Friday.

The Secondary Market Internals remain negative. The NH-NL Ratio bounced back to its 50% neutral line after it dropped to a deeply oversold condition in yesterday’s session. The down spike gives a message for a short-term bottom in the market. The NH-NL Ratio moving average continues to fall which denotes adverse conditions for the markets. We expounded on the Volatility Index in detail in the past few reports. It’s tick down is giving a similar message for a short-term top in the market. As per the above introduction, we are expecting volatility to increase, or to put it in better perspective, to get back to more normal levels after remaining at overly complacent levels for an extended period of time.

The Breadth Indicator remains negative. The McClellan Oscillator remains below its zero line but is bouncing from a deeply oversold level. This is a message for a short-term bottom in the market. A recovery of the falling tops line (red line) would suggest a change of character in the market and a positive oscillator would give a positive message for the market overall. There is still some work to do. The falling Summation Index denotes liquidity leaving the market. This line needs to rise again to denote the opposite, liquidity re-entering the market. By definition, the oscillator needs to get above its zero line which in turn requires positive price action. A positive oscillator would be the first requirement to become more optimistic again.

The Bottom Line. A bounce in prices was expected after yesterday’s “WOW” behaviour in price action. However, the price index made only meagre progress. Prices are respecting familiar congestion levels by 5805 support and 5925 resistance holding. Further overhead resistance can be found at the psychologically important round number 6000. Tuesday’s selloff had a magnitude which pushed prices, price indicators and oscillators as well as our own market internal indicators in deeply oversold levels and conditions. This makes it problematic to apply ‘conventional’ market assessment. For now, prices remain in a confirmed downtrend and Market Internals are negative. More needs to be done to improve the negative technical picture. Remember, a live coward is better than a dead hero. Trading Mode remains Protective.

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Posted 08/02/2018 by Notes on ASX in category Daily Market Update