Treat recovery with caution - chartist Lucy Battersby June 8, 2009
THE current bear market rally is maturing although investors are still trying to squeeze as much as possible out of it, according to a chartist with 40 years experience.
On Friday Wall Street closed marginally higher, up 0.15 per cent, led by the industrials and technology sector, and London's FTSE 100 index closed 1.18 per cent higher.
Locally the S&P/ASX has risen 26.25 per cent since hitting a low of 3145 on March 6 this year, while more than 60 per cent of Global Fortune 500 stocks have met or exceeded a 38 per cent retracement of their falls, according to Garry Abeshouse.
Mr Abeshouse tracks 203 non-finance and 69 finance stocks from a list of the biggest corporations in the world according to capitalisation.
As a chartist, he analyses the retracement figures - how much a stock has retraced its fall - to find patterns and trends.
His latest charting shows the top 30 companies in the Dow Jones have retraced 31 per cent, the S&P 500 31 per cent, the Nasdaq 100 index 40 per cent, and FTSE 32 per cent.
"I think given the severity of the world's financial crisis, the worst in 80 years, the retracement levels of stocks justify a high degree of caution at current prices," he said.
"Over the last 12 months the US dollar and now US equities have formed bearish upward wedge formations on the charts. Upwards wedges are usually very well defined patterns, showing weakening upward momentum, hence the shape.
"These patterns are known to be very common in stocks during bear markets and were especially so during the period 1929 to 1932," he said.
Mr Abeshouse was head chartist at Bain & Co before it was taken over by Deutsche Bank in 1992.
He looks at historical data to find cyclical patterns, often referring as far back as 1875.
"If you look at the charts of past bear markets you will see that almost every major move down in every bear market has been preceded by a 'bull trap', designed to suck in the unwary. This is why it is wise to be cautious of too much optimism this early in the bear market," he said.
Mr Abeshouse also looked at the Australian dollar and found it had retraced 50 per cent of its fall from last year's high of US98c, but its future was difficult to predict.
"Any concerted move down in equities could take the copper price down as well, which is bearish for the Australian dollar, but if the US dollar falls that could be bullish for the Australian dollar - hence the dilemma," he said.
"Historically you would expect to find heavy resistance around the US80c area."
The Australian market will be closed today for the Queen's Birthday holiday.
CommSec chief economist Craig James said the market should start trading positively on Tuesday, with the employment figures from the US showing that job losses were not accelerating.
"It seems that the worst of the job losses is over and, historically, that's always meant improvement in terms of the sharemarket," Mr James said.
"Much depends on what happens in the US [tonight], but at this stage, we would say that the market would be up modestly, perhaps in the order of 10 to 15 points."
Mr James said local investors would also be looking towards monthly economic data from China next week.
(20min delay)