Trading Day

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The S&P/ASX 200 Index had a stonking day, rising some 3.6% or 140 points to 4004. This one day reversal – on the back of a possible Euro TARP – has continued in the futures market, with the ASX200 up to 4030 points and all other risk markets responding, in kind.

Asian markets experienced slightly smaller but impressive moves, Japan’s Nikkei 225 gaining 2.5% to 8580 points, whilst the Hang Seng was up 3% at 17939 points and Shanghai Composite up 1.1% to 2418 points.

In other risk assets, the AUD gained strongly, broaching the 99 cents level against the USD, whilst WTI crude also gained 2.6% to $82 USD a barrel level.

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Gold has moved over $100 USD an ounce within the last 24 hours – remarkable volatility – coming up from clearly oversold levels. It is currently trading at $1655 USD an ounce or $1688 AUD an ounce.

Movers and Shakers
A very bullish day across the board on the ASX, with the biggest gains in, of course, the energy, financials and materials sectors all up over 4%, whilst healthcare was steady.

The banks made huge gains, with Commonwealth (CBA) up almost 4%, ANZ up 5.4%, NAB up 5.7% and WBC up 5.5%. Macquarie (MQG) has reversed, with a 9.4% daily gain, closing just below $22 a share.

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However, the millionaire factory is still almost 50% off its February high of nearly $42 a share:

Cochlear (COH) and CSL were flat, not liking the gains in the AUD, even though most of their revenue comes from Europe.

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BHP Billiton (BHP) and Rio Tinto (RIO) redeemed themselves, with the former gaining 4%, whilst the latter climbed over 5%. Newcrest Mining (NCM) gained back half of yesterdays price fall, up 4.7% on the rally in gold prices.

Lynas Corp (LYC) was the biggest winner on the ASX200 today, up 32% – yes, thirty two percent – after falling 17% yesterday alongside some other stonking small caps – mainly small miners, rising 9 to 15% on average. This is for a single day not a year.

The losers? Not many – Cabcharge (CAB) was down 2.3% and uranium miner ERA lost 1.4%

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The Charts
Yesterday I said we were “in new, dangerous territory. The market has closed at a 2 year low – whenever risk markets do this, thus wiping out 2 years of capital gains, they have a nasty habit of continuing to fall, as everyone capitulates, both dumb and smart money.”

In the very short term, I was wrong – the market has rebounded on a rumor and teared up above 4000 points.

However, I did state: “A rally beyond this level (4000) could go as far 4200-4300 points, on the back of any sort of good news, likely emanating from Europe. I have warned readers before that bear markets include significant rallies – sometimes over 20% as ebullient bulls come back out of the woodwork exclaiming all is well.”

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The daily chart below shows that today’s price action has moved the ASX200 back into its price channel and above resistance at 4000 points, the terminal support level throughout the sideways price movement in late August and September. Even though this was a big day, the short term momentum indicator has not broken through its resistance level.

Although there appears to be daylight above, and today’s action is reminiscent of all bear market rallies, there is significant resistance at the 4300 point level, the intersection of the medium term downtrend since April and the overhead resistance of the price channel.

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For a new cyclical bull market to start, and for this to be the bottom of the medium term downtrend, the market needs to develop a reversal pattern from here – most likely an inverse head and shoulder.

The chart above shows a neckline, in orange, at the 4300 resistance level. The September falls are the “left shoulder”, the recent 2-year low the “head” and a rally thereafter the “right shoulder”. If the pattern is successful, the right shoulder should go on and rally above 4300 points (with a possible retracement back to the 4300 neckline before setting off again).

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If the pattern fails and prices fail to climb above 4300 or the downward trendline (in red, but not extended for clarity) then this is the dreaded dead cat bounce setup and the bear market will continue.

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