Perspectives 14 December 2015

In last week's Perspectives post, I painted a scenario of short-term consolidation followed by the potential for further weakness on the cards. The consolidation element of this viewpoint was fairly short-lived with the fallout of highly publicised political shenanigans providing the catalyst for the anticipated weakness to start playing out in rather dramatic fashion towards the tail-end of the week. The result is that triangle breakout identified last week has nearly played out and we are now fast approaching the breakout target area which was identified between the 42,500 and 43,000 levels. 

Looking at the current weekly chart, we now see that last week's entire candle body painted below the 89 week EMA. In last week's post we referenced the fact that this has only happened in 3 stages since the end of 2009 and this is relevant historical information to keep in mind as we move into the year-end. From the graph we can also see that the weekly stochastic is now oversold but still firmly pointed downwards. Interestingly if it can create a swing low here, we could see the potential for positive divergence being formed on a weekly basis - this is still to be confirmed though. At present both the slope of the stochastic as well as the positioning of the RSI still points to the potential for further weakness.

The daily chart shows the progression towards the breakout target area noted above and of interest will be whether the market can find support around these levels. With the future closeout pending for this week a move below 43,000 could see further sell-off at this significant options level. The stochastic looks to have found a base with the potential for some consolidation/ bounce playing out.

On the daily support & resistance graph we can see that there is clear room to fall towards the 42,500 level unless a support level can be established in the near-term.

Factoring in uncertain elements like the FOMC interest rate decision on Wednesday night and the futures closeout on Thursday, the continued currency and local market fallout in the wake of the cabinet changes taking place, combined with a local public holiday on Wednesday and the week ahead is going to be one of the most fascinating from an analysis perspective. For the last 2 years we saw continued weakness into the closeout followed by a rally into the year-end. But circumstances are undoubtedly fundamentally different this time around. 

My view on this would be that we would need strong consolidation out of the blocks to prevent further weakness over the course of the week or there is a high probability that we will see the T40 fall further into the target zone highlighted above and then towards the 42,500 support level. If that scenario plays out it may well negate the potential for positive divergence on a  weekly basis and the rather bearish proposition set out in the weekly 3LB chart here could be on the cards. Alternatively, if the market could find some form of support here - especially a consolidation above 43,500 we may see this start to base out for a short rally or sideways chop into the year-end.

Either way trading the next few days on the T40 demands extreme caution.  On balance my view remains bearish and I will look to trade intraday moves quickly on both the long and short side with compressed targets to take quicker profits. Another risk management measure I will look to implement with a bearish bias in mind is to half risk size on the long side leading up the futures closeout.