Down, sideways, up

2011-03-24 00:00

Stock markets worldwide broke important support levels recently. The question is: how far will they fall? We look at charts of the JSE All Share Index as well as London’s FTSE-100 index to obtain price targets for the short to medium term. Both charts have well-formed price patterns pointing to clear minimum downside targets still to come. Consequently, caution is advised for the time being and traders will be able to capitalise by selling short.


Trend: Short term down. Medium term sideways. Long term up.

Strategy: Traders sell short on a rally. Investors wait before buying.

* After briefly making a new all-time high (line 3), the All Share Index formed a large “diamond formation” (as labelled). It’s now broken below line 1 support and pointing to a lower target to come.

* The short term stochastic (on top) is relatively oversold but can remain so for longer.

* Traders sell it short on a minor – ie, two- to three-day bounce (ideally on a bounce towards line 1 at the 30 600 level). Investors should wait before buying again, because they’ll get in at better (ie, lower) prices.

* The minimum downside target is 29 650, measured as the height of the diamond projected down. Note: That target is slightly lower than the 200-day moving average, which typically provides support.

* Place your stop-loss for shorts as a close above line 2, which was at 31 930 on Tuesday 22 March. Lower your stop dramatically once the index gets below 29 900, to protect profits.


Trend: Short term down. Medium term sideways. Long term up.

Strategy: Sell short on a bounce.

* In late February/early March the “Footsie” broke below line 1 support of a large channel with line 2. That was a first warning of this market being overheated.

* Furthermore, since January this year the index has formed a rising wedge (lines 3 and 4), which is a bearish price pattern. It’s now broken below line 3 support and is pointing to a lower target to come.

* Traders sell short the FTSE-10 index on a minor (two- to three-day) bounce back towards line 3 (5890).

* Then expect further downside to a minimum target of 5625, measured as the height of pattern 3-4 projected down. Interestingly, that target will coincide with its 200-day moving average (which provides support). (At the time of writing it was trading at 5800.)

* Place your initial stop-loss as a close above 5950. Start locking in shorting profits as the index nears its 5625 target.

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