Clues from the Chinese market

The chart below is of the Shanghai Index. Interestingly, it turned red well before the All Ords - seemingly leading our market down (the red vertical line indicating when the XAO turned red). Ominously, the Shanghai Index has just fallen out of a consolidation zone. Such zones often form at the half-way point of the move. If that is right the Chinese market has another 500 points to fall.

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Another perspective

Here's another perspective of the All Ords. This chart comes from the Advanced Get software. There are a couple of heartening pointers from this chart. First is the number "26 PTI" which appears on the far right side of the chart in the middle of the page. A PTI under 36 indicates a "failed wave 5". In short this means that the move down which started this past week is likely to end at or above the low made  in May. Secondly, the fact that the rally from the May low ran up above the "red tram tracks" (which you will find above the blue and green tram tracks) increases the probability that the decline from the June high will not be long lasting. Having said that, anything is always possible including the market falling well under 4,000.

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Also, while the above chart is interesting, the best guide is always the XAO Indicator. Here's the chart showing the XAO Indicator for 25 June 2010.

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Is the Indicator pulling back from the brink?

The area covered by the long blue rectangle in the chart below has formed substantial support for the All Ords Index since October 2009. Often, previous support will act as the new resistance level (and vice-versa). Right now the index is in the middle of that support/resistance level. There is a danger that it will fall back from here just as it is on the verge of turning positive (blue). This not uncommon. So, we continue to be wary that the next major move could yet be down.

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Change of direction looking inevitable

The XAO has a look of inevitability about it. Today's close was 4,633. Any intra-day move above 4,680 - that's 47 points away - will turn the XAO Indicator blue. If it does turn blue, there is a 67% chance it will go higher before turning red again. This is based on data going back to 1980.

How much higher? Who knows? In truth no one can know for sure. What we do know is that when the bars are blue it is a good time to be long. When they are red, it is a good time to be in cash or part cash and part shares. Another option when the bars are red is to buy some insurance by way of options but that is something for another day. Here's today's chart.







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Where will XAO Indicator turn blue again?

XAO Indicator will probably turn blue again at 4,680. That's only 135 points away. That would be an interesting turn of events given all the talk about double dip recession. Anyhow, talk is just talk, what is relevant is what is actually happening. At the moment the market is telling me to be cautious. When the bars turn blue, I will be taking a positive stance. Will keep you posted.

Here's a current daily chart covering the past 12 months.

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