Technical Analysis 12th December 2018

Santa Rally Imminent

This past week the S&P 500 had an overall range of 189 points from high to low, the NASDAQ traded in a 476 point range and our Australian 200 traded in a 161 point range. The Australian volatility index XVI moved higher to 20 as forward risk is priced in, the US VIX also moved higher at 22 this being all too bearish for equities. For a bullish stance the respective indicators would be below the 13 level.

Market volatility this week has been blamed on the sudden turnaround in sentiment surrounding the US China trade deal. This is a deal the Chinese need more than the US. China’s economy is continuing to slow with GDP in the mid 6% range and falling YOY. More importantly China is facing the same issue the US has with Current account deficits. While the US is trying to put its current account back on the positive side of the ledger, the Chinese are trying to stop their current account further declining and possibly moving into the negative.  We have a high stakes game for both players.’

Equities are paying the price for this reassessment of global growth in 2019.


Trade wars. What started as the US raising tariffs on imported Aluminium and Steel, has descended into a major standoff between China and the US incorporating tariffs on Hundreds of billions of dollars of trade between the two counties. Along the way equities markets have paid the price for falling sentiment towards global growth, something the international monetary fund has been warning about for the past 12 months. As Chinese weaker Purchasing managers Index (PMI) numbers came to the market in early December it only confirmed what the commodities markets were beginning to price in, slowing demand.
In some cases this past quarter has been one of a dichotomy of pricing in the Commodities space, Oil entered a major corrective move lower at the same time Liquefied Natural gas (LNG) is trading at 4 years highs.
This past quarter has seen Australia become the world’s largest exporter of LNG, a crown Qatar has held for many years.
Chinese coking coal futures jumped to their highest in nearly 15 months, supported by tighter supply amid safety checks at coal mines, coke used in the steel making process surged nearly 6 percent in a five-week period, while the finished steel Rebar prices have tumbled 27% to USD$510/ tonne.

China exported 536,000 tonnes of unwrought Aluminium and Aluminium products, including primary, alloy and semi-finished Aluminium products, in November, up from October’s 480,000 tonnes.
While the recent G20 meeting was underway both the US and China agreed to halt further tarrifs for the next 90 days. On the next market open a 104 point gain was registered only to be followed by further declines as market cast doubt onto the deal, as the Chinese failed to confirm the discussions. Volatility up and markets down.
The chart below is a 30 day average of seasonality of movement in the Australian market.

The highlight of the chart is the Christmas rally with an average starting time in the 2nd week of December. The question to ask yourself, is the current 2018 market displaying signs of a base and more importantly a bullish rally over the holiday period.
Lets take a look at some drivers of the Index , remembring the Index is heavily weighted to the 4 banks and a few large industrials including WES, BHP and CSL.
Traders should also be mindfull that there always remains good trading opportunities in individual stocks outside of the top 10 drivers of the Index.

Taking a look at the 3 major Index charts Australian 200 CFD, the S&P 500 and the Nasdaq100, they are posting very similar basing patterns.

The daily chart of the Australia 200 CFD shows the resistance level of 5792 as the first resistance level on any move higher by the Index. What this chart really highlights are the 3 significant lows in place, with last nights movement at (3) making a break below price support point 2, this is a very bullish sign the market has support at this level. With the higher close back towards 5600 points a further move higher could be expected. Traders should be mindful of the low at point 3, as a breakdown below this level would have the “long side” of the market forced to take stops, as this process takes place lower prices can occur.


The SP 500 daily chart also posted the same type of bullish setup with a move below point 2 and a higher close to the top of the daily range. To confirm the bullish case a close over resistance at 2820 is required, some 184 points from the current close. The bullish engulfing candle (3) is a good start to reach the highs.


Taking the current index movements as a proxy for overall trader sentiment, and taking onboard the seasonality of the Australian market, the potential for a Christmas rally is well underway. The importance of Stops cannot be under estimated in this current volatility.


Have a great Christmas Holiday Season

We will be back in 2019.

Gary Burton  CFTe

+61 409025723


For those who choose to start in the right direction.

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