blood oh yes 2

The Importance Of 5500
FN Arena News - February 21 2008

By Rudi Filapek-Vandyck

At some time in the afternoon on Thursday we received a phonecall from one of our regular contacts in the stockbroking industry: "You watch, it's going to happen" the voice said on the other end of the line.

I only had to look at my pc screen to know our voice on the phone was referring to a story we published the day before, after the close of the market on Wednesday (see "Aussie Market To Breach Technical Support On Thursday?", February 20, 2008). What previously appeared like a market that was going to comfortably book a gain of 80 or even 90 points for the day was gradually giving up all those gains.

There are quite a few rumours around that hedge funds, local or overseas, have gone into a habit of shorting the Aussie market in afternoon trade. Our story on Wednesday was inspired by further losses in the last hour of trade that day, and the fact that the market (ASX200 index) had closed right at/or just below major technical support at 5500, which had quite a few professionals worried on the day.

Wall Street opened lower that night so those concerns seemed justified at first, but they proved futile the next morning with US shares comfortably gaining between 0.7-0.9% for the day. But then, in the afternoon, early gains disappeared and the S&P/ASX200 index sank again below 5500 in the last hour of trade. This can clearly be seen on the chart for the day (see below):






Five minutes later I was queried by colleague Greg: did I see that? The index bounced exactly at 5496.50, which was the closing level of the prior day. He concluded: "That's pretty hard to pull off [in a 200 stock index]." In fact, if you hadn't looked at the index at the time, and you hadn't bothered to look at the daily chart afterwards, you wouldn't have noticed the index did test the support level again as it closed with a comfortable 1.5% gain for the day at 4pm.

So how important is all this? What makes that 5500 level so "special" ?

We asked one of our contacts in the industry who knows much more about technical analysis and technical market indicators than we will ever know in our lifetime. What we understand from his detailed response is that (as we reported earlier) 5500 is one of those key support levels underneath the market that has been built, confirmed and strengthened over the years.

However, our expert (who asked us not to mention his name) also tells us investors should not draw too much comfort from the fact that on Wednesday, and again today, the support level has not given in as the overall market trend remains bearish which is, among other things, confirmed by the fact that in general the market is range trading at lower price levels than the previous week.




The importance of the 5500 level was explained to us in the second part of his reply and we happily repeat the full explanation as we received it onThursday afternoon:

"Western analysts and traders tend to look for precision at exact price levels, in fact prices often "vibrate" in price zones (which is what the Japanese traders and funds consider) at important price levels. The closer the time frame to the present day action, then the more likely the market vibrates to the most recent price level within the historic support/resistance zone that is established by historic market-movements at that level. Hence the support at yesterday's low (which was also the close). Large candles often provide tops and bottoms at these levels.

"The charts indicate the price movement has "vibrated" at this important level previously. The horizontal line at this level indicates these levels historically.

"As marked on the two charts the "vibration" zone of previous support/resistance is namely at 5496.3 (Nov 7 2006), 5493.9 (Nov 8 2006), 5495.7 (Dec 1 2006), 5488.2 (Dec 14 2006), 5499.0 (Jan 8 2007), 5502.0 (Jan 9 2007), 5483.3 (Aug 16 2007) - even spiking down to this level at this time."




Similar to an analysis made about the Dow Jones by Dennis Gartman on Wednesday, our expert believes the Australian share market looks like it is currently being "fenced in" - with the "fence" trending narrower and narrower around a major line of support. Both Gartman (see chart below) as our expert suggest this will ultimately prove bearish with both indices expected to give in eventually to the downside.

Could this be the reason why hedge funds are believed to be shorting the Aussie market almost by default these days?





(Special note: If you are reading this story via a third party distribution channel you may find that the charts are not included. Our apologies for this).