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ASX200: Downturn Still Expected

Technicals | Jul 29 2019

By Craig Parker, asset manager, Moat Capital

Things are getting a little hairy right now. I have been monitoring the bearish divergence on the weekly ASX 200 RSI and if you see below it has been indicating Bearish sentiment for some time now. As with any other indicator it has to be taken with a grain of salt or at least in conjunction with other complimentary indicators. If you look at the previous time this happened the market eventually had a decent correction, and this is likely to happen again.

The RSI Bearish divergence has been going for some months now and history suggests the market can only hang on for so long before it capitulates. The S&P 500 is still powering on after a bullish range on Friday. The monthly range isn't that significant however, based on the S&P 500 price action the uptrend looks set to continue for the short term at least.

Locally our dollar on the weekly chart hit the 40-week moving average and found resistance again. This is bad news for our dollar and perhaps good news for our exporters. The ASX 200 is possibly some weeks away from a fight between the Bears and Bulls where the Bears will win out. Speaking of the validity of a 40-week moving average and you can see on the weekly Oil chart the price action fell away around the average. There are so many geopolitical events in the world right now that it is hard to get any read from the price action in a chart. One chart that does hold some credibility and that's the monthly ASX 200 chart below. You can see it is about to hit the ceiling on the up-trending channel where there is a very high probability that the price action will move sideways or down. Another key chart that is nearing resistance is the monthly Financials chart and the resistance is the long term down trend line in a descending pennant pattern.

In summary I would still be looking out for a downturn in the coming weeks or at least a period of distribution where the Bulls are dispersed as the Bears run in. It will also be interesting to see if the yield curve reacts like it did in 87 with a recession within 6 months. Enjoy your week!

ASX200 daily

ASX200 monthly

ASX200 financials ex-REITs monthly

S&P500 daily

Brent crude weekly

AUDUSD weekly

US ten-year yield minus three-month yield

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