Trading Day: bull trap?

The S&P/ASX 200 Index closed 5 points or 0.1% higher to 4353 points after a very solid open was sold off during the day. In after hours trading, the index is steady, with Euro and US markets pointing to slightly lower or steady opens after the frivolity of last night.

Asian markets outperformed, with Japan’s Nikkei 225 up 1.4% at 9050 points, the Hang Seng up almost 2% to 20071. The Shanghai Composite also did well, bid up 1.55% to 2473 points.

In other risk assets, the AUD has jumped again, currently trading at 106.68 cents USD, whilst WTI crude slipped a little from its overnight jump, now at $93.51 USD a barrel.

Gold lost a little during the Asian session and is currently at $1738 USD an ounce or $1628 AUD an ounce.

Movers and Shakers
A mixed board on the ASX today, although the morning session was a good one, with IT the best sector up 2.1% and healthcare the worse, down 1.8%.

The banks finished in mixed territory, with ANZ up 0.4%, Commonwealth (CBA) steady, National Australia Bank (NAB) up 0.46% (WBC) down 0.35%.

Macquarie (MQG) outperformed climbing 3.3%, after announcing a 10% share buyback, using its dormant cash war chest as its pathetic Return on Equity (ROE) remains below a term deposit rate…

Cochlear (COH) slipped 0.4%, whilst its “twin” CSL fell almost 3%. Telstra (TLS) also took a hit, down 1.5% but it remains in an intermediate uptrend.

BHP Billiton (BHP) rose above $39 a share but came back and closed up 0.9% whilst Rio Tinto (RIO) was up 0.75%, gold miner Newcrest Mining (NCM) lost 2% as the price of gold in AUD continued to fall on AUD/USD strength.

Fortescue (FMG) eventually finished down 0.6% Woodside Petroleum (WPL) up just over half a percent.

Woolworths (WOW) has continued to be sold off, down more than 1% below support at $24 a share and now at a 3.5 year low:

The Charts
I want to start today’s chart analysis with a quote from anti-hero Hugh Hendry:

Markets are irrational but they are right at every moment. They are right until they are wrong. You have to marry the notion of being right or wrong with being right with the timing of a given proposition.

Yesterday I explained that we are either seeing the start of a new bull market, the continuation of a bear market rally, or perhaps a trap. A bull trap.

Investing and trading is about dealing in probabilities, not certainties. Another anti-hero, George Soros said it best:

It doesn’t matter if you’re right or wrong, its how much you win when you’re right and how much you don’t lose when you’re wrong.

Enough with the philosophy, let’s look at the daily chart first:

Click to enlarge

Normally I would make this a full width chart, but it doesn’t capture the candlesticks properly and today’s looks like a classic bull trap. An opening gap, then a sell down, shown by the long tail above the daily candle.

As I said yesterday, the daily downtrend line (marked in red) from the April high has been broken, but this could be a false breakout. Given the severely overbought conditions in Euro and US equity markets – which we follow – caution abounds.

The springing of the trap would involve a failure to abide by the green uptrend line.

Looking at the weekly chart: (sorry about the size)

Click to enlarge

The current trend is still intact but the market has not broken through to the upside congestion area above 4450 points on a weekly basis.

Hedged medium to longer term “long” equity investors should still be “NOT LONG” in this environment.

Watch my “Chart of the Day” posts for continued analysis of US, Euro and Asian markets which will lead the way.

www.twitter.com/ThePrinceMB

Comments

  1. good coverage as always mr p. was a strange day with the market givng up pretty much all the mornings gains but there was a strong bid in the match that saw the market close off its lows. the first chart misses this.

    I dont think its a bull trap. +5% in a week its hard to hang onto those sort of gains especially going into a quite week on the domestic front wih spring carnival meaning attentions elsewhere. after taking out multiple trendlines pretty easily looks to me like the bear market of 2011 is over. a pull back to what was resitance at 4300 would be expected. id be using that to add new longs especially if you get a rate cut on cup day. nice weekend to all

      • checked the post AC and i just dont see it. i reckon prince has it right on his last weekly chart and its time to start drawing lines below rather than above the market. the key resitance / and down terndline at 4300 level was obliterated on its first attempt. no real resitance at all. not only did it smash through it put on another 115 points before it pulled back i.e the 2011 bear market it over. i know that upsets alot of bears but thats whats happened.

        as an aside yesterday day was the first day in about 4 or 5 months that the phones in the dealing room really stated ringing, clients on hold, multiple lines ringing, people wanting to open accounts that sort of thing. dealing rooms around the country have been dead like ive never seen it before, not even in 08. talking to the insto guys the fundies havent been active either. so this market has put on 550 points before retial or instos have even got involved. if those highly cashed up investors step off the sidlines and back into the game and i reckon the 4300 level was the trigger, then this market will continue to run hard for a little while yet.

      • > so this market has put on 550 points before retial or instos have even got involved

        That’s the real point about this rally – the big players weren’t a part of it, though a few probably got caught without a position on Thursday and contributed somewhat to the upswing.
        Not sure about Prince’s overbought signal, as volumes reports from the exchanges are still down on average.
        The point being what happens when the big players step back in? My view is that anyone with a timeframe of more than a few weeks is not getting long anything but gold in this market, given they are already in cash.
        We have a classic false breakout signal on the ASX, but there is a real risk from the news feed of this not playing out Monday morning. More government intervention can crush this rally or feed it.

  2. Wait, weren’t you saying finishing above 4300 for the week was a key point in breaking out of the slide/holding pattern?

    I know this is irrational exuberance and all needs to be taken with a pinch of salt at current levels, but I just wonder what relevance the earlier discussion about 4300 being a resistance level likely to flip into a support level?

  3. Took half profits around 11am and set stops to break-even on the remainder. We’ll see if this rally has legs, as US dollar destruction by the Fed does not mean anything other than this is what the Fed is basically good at – stoking equity rallies.

  4. More philosophy.

    The markets are neither irrational nor right nor wrong. They just are.

    People who expect the market to be rational and ordered are wrong.

    But that little insight gets us precisely nowhere.

    Yes, Slipstream Trader hypothesizes that a sell-off opportunity may be emerging.