Technical Analysis: 13 December 2019

About the author:

Violeta Todorova
Author name:
By Violeta Todorova
Job title:
Senior Technical Analyst
Date posted:
13 December 2019, 1:32 PM

Dow Jones Industrial Average

DJIA has been trading in a primary up trend over the past ten years which is still technically intact. The market advanced from a low of 6,469 in March 2009 to a high of 28,174 in November 2019, an increase of 335% in just over a decade.

With ongoing trade war talks and Brexit, volatility increased significantly in January 2018.

The strong up trend took a breather and the index has been trading within the boundaries of a broadening wedge pattern over the past two years. The pattern shows a lot of uncertainty, reflecting the geopolitical risks that dominated headlines throughout 2018 – 2019. While the direction of the breakout for the broadening wedge is random, we note that the price action has spent more time within the upper end of the pattern.

Applying distribution analysis to the broadening wedge, we conclude that the market remains strong and the index could extend its march further. This has become a buy high, sell higher market with the strength related to a US-China trade deal that seems to be coming together.

From 2018’s quantitative tightening and 2019 quantitative and fiscal easing, the market has rebounded to an all-time high, and is currently testing the upper trendline of the wedge.

The weekly momentum indicators are overbought suggesting a pull back to unwind the overbought momentum conditions could be seen in early 2020.

Taking a longer term view, being so late in the cycle, the clear loss of momentum over the past two years and the overbought and diverging monthly momentum conditions, which could be seen in the small 30 - year monthly chart in the upper left corner, warrants caution.

Either the cycle turns or rolls on until the US election. Given the environment of elevated political uncertainty, we think it is prudent to focus on capital preservation and take advantage of opportunities as they present themselves.

With the synchronised wave of dovish central bank policy, the strong employment market and the Fed expanding its monetary base, our view is that throughout 2020 the market will continue to trade sideways within the boundaries of its current broadening wedge, rather than rolling over.

Volatility is likely to remain elevated and a deep correction to at least the middle of the consolidation pattern crossing at 24,800 is likely in the year ahead.

S&P/ASX 200

The S&P/ASX 200 index has been trading within the boundaries of an up trend channel over the past 10 years, which remains technically intact.

The index advanced from a low of 3,120 in March 2009 to an all time high of 6,893 in November 2019, slightly exceeding its November 2007 peak of 6,851. The market advanced 120% from trough to peak and has considerably underperformed the major developed market indices.

The Reserve Bank of Australia rate cuts appear to have supported the equity market for now, but low wage growth and weak spending patterns continue to weigh on sentiment. The index is approaching its channel line crossing at 7,000 which is likely to act as a resistance.

A bearish divergence between the price and the RSI indicator has formed on the 10-year weekly chart suggesting that near - term upside from here is likely to be moderate. A pull back to unwind the weekly overbought momentum conditions would be considered healthy, which could be seen in early 2020.

Key level to watch moving forward is support of 6,396, which if broken would signal an extension of the correction to 6,000, where strong buying interest is likely to occur. The RBA’s rate cuts and repeated mentions of quantitative easing show it’s preparing to defend against an economic recession.

If the RBA pulls out the big guns, this will likely support the equity market as investors look for returns to beat deposit rates and as newly created money is flushed into the economy.

Generally, news about any stimulus drives share prices higher and typically the gains occur six months in advance of cuts to the cash rate or any other stimulus program.

With the market rallying more than 20% in 2019 and valuations becoming increasingly stretched, we are of the view returns are likely to be more subdued in 2020.

Our baseline scenario is that the market is likely to fluctuate between 6,000 and 7,000 – which suggests downside risks to current levels.

FTSE 100 Index

The FTSE has been trading in a primary up trend since March 2009, fluctuating within the boundaries of an up trend channel. The index advanced from a low of 3,460 to a high of 7,903 in May 2018, rising 128% in 9 years.

Brexit uncertainty and a volatile British pound stalled the rally as economic policy uncertainty depressed business investment and business confidence. For most of 2019 FTSE traded between 7,004 and 7,727 and is currently sitting closer to the bottom of it’s range.

The elephant in the room with that suppressed trading activity is both the UK’s December 2019 general election, and the Brexit deadline of January 31, 2020.

The FTSE 100 underperformed the major global stock markets over the past two years and if we eliminate the Brexit concerns and assume a return to a stable environment, we see the potential for a “Brexit bounce” in early 2020. The potential upside target is 7,800.

Throughout 2020 the index is likely to fluctuate between 6,750 and 7,800 and with monthly momentum conditions close to oversold territory, we see upside risk from current levels.

Shanghai Composite Index

The Shanghai Composite Index has been trading sideways over the past three years, fluctuating between 2,440 and 3,587.

With globalization major equity market cycles tend to coincide, with major market tops and bottoms occurring at almost the same time.

However, Chinese equities have been navigating their own uncertainties and exhibiting a completely different cycle compared to the rest of the major equity indices and have significantly underperformed their peers in recent years.

Trade and policy actions were two defining factors for Chinese equities in 2019.

The index rebounded strongly at the beginning of the year thanks to expectations on stimulus and a trade negotiation resolution, but started declining in April as hopes faded.

As we enter 2020, those factors will not go away soon and will stay with us for a while.

The weekly momentum indicators are in neutral territory and the index remains trapped in its trading range.

We believe Chinese equities will continue to trade sideways throughout 2020 with a good buying opportunity arising on a pull back towards 2,500 – 2,600.

More information

Morgans clients can login to view all recent technical analysis on companies we cover by browsing the research section and filtering by 'technical analysis' in the Market Updates section. If you are interested in finding out more, please contact your nearest Morgans office.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents ("Morgans") do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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