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Key factors for sharemarkets and commodities

This article appeared in the January 2014 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.

What the price charts say about US and Australian shares, gold and oil.

Photo of Regina Meani By Regina Meani, Your Technical Analyst

As we put away our Santa hats, it is time to reflect on global sharemarkets and what may be in store for us in 2014 after a contentious year.

Looking at the charts, we find the US sharemarket, as reflected in the Dow Jones Industrial Average iNdex approached the year-end in a vulnerable position, while the Australian market seemed safely underpinned. The two most sought-after commodities, gold and oil, appeared to be in bounce mode as the year moved towards its close.

Here is an analysis of four key charts for share investors in 2014.

Dow Jones

The 1970's with 90's input

Dow Jones Industrial Average line chart - January 1989 to January 2013

Source: Regina Meani - Your Technical Analyst

My long-held view is that the New York market is in a similar phase to that in the 1970s.  Between 1964 and 1982, the US market tracked sideways for 18 years and then moved in a strong upward path for 18 years before halting in 1999 and starting a similar sideways track. Comparable events would be the 1970 and the 1974 lows with the 2009 low and the recent rise with the 1975-76 up move, but more important are the comparisons with the 1982 upward launch.

However, the shorter-term factors have pointed to vulnerability and we need some clarity on the next few shorter-term moves before the next major up-leg can be verified for the index.

In 2013, the US market performed strongly, sweeping past its problems with hardly a backward glance, gaining some 23 per cent at the time of writing. As it hovers around 16000 points it faces a major barrier around 16650, but this will rise slightly on its upward slant over time. The barrier held back the index in 2000 and again in 2007, forcing significant falls for the market.

At this stage, the indications are in conflict and there is no discernable signal to herald an attack and breakthrough of the barrier, but this may only mean a delay.  However, until this quite critical hurdle is overcome, a more cautious stance on the US market is indicated.

The important trigger points on the Dow, besides the 16650 breakout point, would be support located close at hand around 15700-800 and then more importantly between 14900 and 15100. If this area is breached over the near term, it could lead to a more serious style downturn for the US where we could not rule out comparisons with that experienced in 2000 and 2007.

Australian All Ordinaries Index

Not exactly but ....

 Australian All Ordinaries Index line chart - March 1940 to March 2012

Source: Regina Meani - Your Technical Analyst

The Australian market, as it headed towards the end of 2013, appeared to be in a more secure position than the US.  Its long-term path is well established and is unlikely to be threatened by any market pullback. As with the US, there are strong similarities on the charts to the 1970s and the 1990s, but the Australian market forged a strong base from the 2009 low that can underpin much higher levels.

Added to this, at the end of 2012 the index cleared a significant downward trend set from the 2007 peak. These are notable milestones for our market.

Moving in closer to the year-end action we find that when the index reached 5453 on 28 October 2013, a combination of circumstances came together to halt the advance. The index had hit its first objective from the base and encountered several resistance areas drawn from the early 1990s, from 2008 and through 2013.

The overall experience for the index during 2103 has been one of run and pause and in October another pause action was triggered. As the year approached its end, the market tested support around 5000 but similarities to the 2009-10 phase suggests more volatility may take us into the New Year and a drop through this support line could see lower support tested in the 4800-5000 range. 

An early return to the upward path would be heralded by an initial rise back above 5300, with higher barriers to overcome in the 5380-5450 area.

Gold

In April 2013, the gold price broke down from a triangular top pattern and set in motion a corrective action. Following this episode, I continued to hold the view that the long-term chart for gold suggests there is still significant upward potential for the price in the coming years.

The caveat to this statement is the current correction in gold, and how long it will influence the price before a new upswing can be supported. Therefore, the main question is whether the corrective action we have seen in 2013 qualifies, or whether the price needs to return to trend support as it did in the 1970s or perhaps break it for a longer chapter. 

1975 or 1980?

Gold line chart - March 1940 to March 2012

Source: Regina Meani - Your Technical Analyst

If we look at the quarterly chart (above), the equivalent trend to that in the 70s would only be breached if the gold price fell beneath $1000 an ounce. If we come in closer to examine the shorter-term charts, we find the price tested serious support around $1200 towards the 2013 year-end, as it did last June. Momentum diverged from the June turning point and swung into a more favourable register, giving added weight to the idea that it was highly likely that the metal could hold its position, bounce and rally into 2014.

Barriers to the rally as the year ended were located in the $1250-70 range and then, more importantly, in resistance located around $1300 and then in the $1350-80 area.  A clear break from this area would be positive for a stronger recovery.  The danger faced at the end of 2013 was that while the price hovered around $1200, there remained the risk of a break below and a drop towards $1120.

Oil

The oil price sports an impressive history, exhibiting a well-established upward path. There is a marked resemblance on the long-term chart to the volatility experienced in the 1980s and 1990s, and as with the gold price, the question is whether the price needs to return to trend support ahead of the next major advance. When the price hit $110 in September 2013, it reminded me of the 1996 barrier.  At that time, the price fell back to seek long-term support.  

An impressive history

Crude oil West Texas international line chart - September 1972 to September 2009

Source: Regina Meani - Your Technical Analyst

In monitoring the 2013 year-end moves, we find that the downward trend instigated at the 2008 peak was broken in July, triggering the rise to the $110 barrier. The subsequent drop saw the price fall beneath the recently broken trend in what appeared to be a bear trap as the price bounced and recovered into positive territory.

For the oil-price outlook to remain optimistic as the New Year starts, the West Texas Intermediate price needs to stay above $90 a barrel and battle higher resistance located at $98.60 and then $103.50 and $106-107 before taking out $110 for the potential for higher prices.

About the author

Regina Meani is a freelance consultant in market analysis and one of Australia's leading technical analysts. Her company, Your Technical Analyst, provides analysis of the above markets to major institutional and individual investors and traders, as well as private tutoring and larger seminars for training in market psychology, CFDs and shares, and technical analysis.

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