Monday, July 6, 2009

Fallible Prophecy - Where 2 from Here?

So where do we go from here?

Sp500 showing head and shoulders dowside breakout - but this is conflicted against support levels and the golden crossing (50MA crossing the 200MA).

Here are a few key economic issues that are being debated

- inflation vs deflation - right now we have the good forces of inflation (govt increasing money supply) battling the evil forces of deflation (falling housing prices, high unemployment rates). Which side will win? It doesn't matter - unless inflation is balanced at a sustainable rate, high inflation or deflation will have negative consequences - which will lead to lower market prices.

- commodity prices and china - china has been pumping money like every other economy and luckily for Australians it has lead to higher commodity prices. In recent days, China has talked down their purchases - saying that prices are too high...could this lead to falling commodity prices -> falling AUD and falling ASX200 (short bhp, rio)

What are the weekly charts telling us?

Judging from the weekly charts there seems to be 3 scenarios, it looks like we might go for correction in the W shape or a small retracement or a new bottom. The small retracement seems the likeliest, followed by the W bottom and the new low.

The Green line represents the small retracement most likely outcome, the Blue represents the W shape bottom and the orange represents the worst case scenario for prices.

the Blue line scenario will probably present the best trading opportunities as I believe the gradient for the fall in price and its subsequent recovery will induce some high volatility conditions.

The fibonacci number to look out for is 3594 on the ASX and if it doesn't hold there, good chance it will go to 3300 quite easily.