Charting: Outlook for world sharemarkets
- Fri 02 July 2021
What the price charts say about key indices in the US, Australia, UK and China.
ASX Investor Update asked Violeta Todorova, a leading technical analyst with Morgans, for her view on what the charts are saying about Australian and global equities for FY22.
1. S&P 500
Source: IRESS
The S&P 500 index in the United States has been trading in a strong uptrend since March 2020, posting a fresh record high of 4,257 on June 15.
On Wednesday, June 16, the index lost ground and headed solidly lower after the Federal Reserve signalled that policy makers expect rates to rise earlier than previously expected by pencilling in two increases by the end of 2023.
The uptrend has slowed over the past four months; however, the price structure remains constructive at this point and as long as support of 4,056 holds, the secondary uptrend remains intact.
The 423.60% Fibonacci retracement ratio measured from the December 2007 high to the March 2009 low shows the first major resistance for the primary uptrend arises around 4,500, therefore, we see a good probability of the index reclaiming this level.
While the daily Relative Strength Index (RSI) indicator remains in its bull-market range at this time, the weekly and daily readings are overbought and we have a clear formation of a bearish divergence over the past two months on the daily chart, which suggests the pace of the uptrend is likely to moderate in coming months.
Overall, the index is overbought on a weekly and monthly basis, which is the first red light flashing on the chart, showing the market is expensive and warning investors that some caution is required.
Despite the overbought momentum conditions, we don’t see a reversal of the uptrend yet and as long as support of 4,056 is intact, we are of the view that the index may overshoot to 4,500 in the next 6 to 12 months, before a deeper decline takes place.
2. S&P/ASX 200
Source: IRESS
The S&P/ASX 200 index (XJO) in Australia has been trading in a consistent uptrend since March 2020, recently breaking above its February 2020 high of 7,197 and reaching an all-time high of 7,406 on June 16, 2021. The price structure remains constructive at this point and we favour higher levels over the medium to long term.
With equity valuations at historic highs and the weekly and daily RSI indicator in overbought territory, we see the index as being vulnerable to a pullback in the short term. A decline to 7,150 is a fair possibility in the weeks ahead.
Despite the weekly and daily overbought momentum conditions, which always warrant caution, over the long term, we don’t see a reversal of the uptrend at this stage.
From current price levels, only a break below support of 6,905 would show deterioration in the trend, which could trigger further weakness in the month(s) ahead.
Overall, the daily momentum indicators remain in their bull-market range and despite the overbought weekly momentum readings, we are of the view that the index could overshoot and extend its march higher to 7,600 over the medium term.
3. FTSE 100
Source: IRESS
The FTSE index in London has been trading in a secondary uptrend channel since March 2020, which is still technically intact. The FTSE is one of the few major indexes still trading well below its January 2020 high, reflecting slow growth during the pandemic months.
Also, the FTSE 100 consists of numerous large companies facing challenges, such as BT Group, Vodafone and Royal Dutch Shell, which are pulling down the index.
Despite its lagging and recent underperformance in comparison to the rest of its peers, the FTSE is likely to recover from the disturbance due to Covid carnage and appears to have immense potential to reclaim its January 2020 high of 7,689.
The long-term uptrend line on the daily RSI indicator still provides support showing that momentum is constructive and supports the positive outlook for the index over the medium term. In the short term, the index may experience a mild pullback, but we are of the view that the weakness is likely to be short-lived.
Overall, our view on the market is positive and we see levels to 7,600 as achievable.
4. Shanghai Composite Index
Source: IRESS
The Shanghai Composite Index has been trading in a strong uptrend since March 2020, which is still technically intact.
The recent secondary upswing traded above the December 2015 high of 3,684, which has been exerting resistance over the past six years.
Although the breakout has not been clear and decisive, it shows that buying interest is building up. Over the past four months, the uptrend took a breather to unwind its overbought weekly and daily momentum conditions and the index has been trading sideways, fluctuating between 3,328 and 3,731. In the coming months, we expect further consolidation to unfold.
The weekly momentum indicators remain constructive at this point and are in their respective bull-market ranges. Therefore, we are of the view that a subsequent break above key resistance of 3,684 is likely.
This would confirm the large inverse head-and-shoulders pattern that was built over the past six years and would signal that a new primary uptrend is starting. The first potential long-term upside price target based on the breakout is 4,000. However, this level could be exceeded in the years ahead.
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