ASX 200 Bounce Not Strong Enough

By Michael Gable 

After the market was sold off heavily during May, I felt at the time that the most likely scenario would be a V-shaped recovery up towards 4250. From 4250, the market was at risk of falling back under 4000 to retest the recent low. However, recent price action on the market has made me more negative on the market. As such, I have had to change my outlook. We did see a relief rally in the market, but it didn't follow through with that extra 100 points that I was anticipating. It was also not as "V-shaped" as I was anticipating. In other words, the rally should have been bigger, and should have been quicker. This tells me that we have not seen a low in the market. We are merely buying time before we suffer another savage sell-off.
 
Below is a chart of our market a year ago:

After falling down to point "0", our market made an "abc" correction. An abc correction is a 3 wave counter trend move. As we can see on the chart, once this correction against the trend was complete, the market suffered another large fall. This fall was 1.6 times the initial fall to point "0", which is a key Fibonacci level. Notice the very large reversal on the August low? That is the kind of reversal that we need to see. That is what a low in the market looks like. That is telling you that the market is so cheap and oversold that the big money starts coming in. If the market is cheap and oversold now, then why haven't we seen this type of reversal? Where is the buying? Why, if the market is cheap, the Greeks have had their elections, and Spanish banks are receiving a bailout, why are we not seeing volume coming in and drive the market higher? What else do we need to see? A cheaper market. That is what I think we need to see.

Below is the market this week:

I feel that our market is on the way to completing a "c wave" of an abc correction. If this is like the first chart above, then this "c wave" will be followed by a big sell-off. Remember I noted that the move down last year was 1.6 times the first move? Well if we measure that out, it indicates a 600 point drop once the "c wave" is over. That gives me a level of 3550 dn the XJO. I don’t know whether it will happen as quickly as it did last year, but I am confident of the final level.

So to summarise, initially I was expecting a V-shaped recovery at the end of May. Like August last year, the massive sell-off caused the market to be oversold, hence the big move up in the order of 10% in a week. Our market has not had this v-shaped recovery. Therefore the market is not attractive yet. Either Europe’s problems need to go away, or the market needs to get cheaper. I therefore feel that we are only half way through this downwards move that started in May. The market is at risk of dropping further. If the market gets sold off and we then see the big buying come in around that 3550 level, then you can be sure that the market is cheap enough and you can start buying. If you see that V-shaped bounce, then that’s a good low in the market. As a result, I am moving some holdings to cash, writing covered calls on existing shares, and buying put options on the market.
 

Content included in this article is not by association necessarily the view of FNArena (see our disclaimer).
 
Visit Michael Gable's website at www.michaelgable.com.au.

After leaving Macquarie Bank's Securities Group in 2008 after many years of service, Michael has gained a highly regarded reputation in the financial services industry. As a Private Client Adviser with Novus Capital, Michael has become a popular live commentator and analyst for Sky News Business Channel’s “Your Money, Your Call” program. He is also the author of the weekly stock market report “The Dynamic Investor”.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2

Disclaimer

Michael Gable is an Authorised Representative (Rep. No. 376892) of Novus Capital Limited AFSL 238168 ACN 006 711 995. Michael Gable and Novus Capital Limited, their associates and respective Directors and staff each declare that they, from time to time, may hold interests in securities and/or earn brokerage, fees, interest, or other benefits from products and services mentioned in this website. This website may contain unsolicited general information, without regard to any investor's individual objectives, financial situation or needs. It is not specific advice for any particular investor. Before making any decision about the information provided, you must consider the appropriateness of the information in this website or the Product Disclosure Statement (PDS) or Financial Services Guide (FSG), having regard to your objectives, financial situation and needs and consult your adviser. Any indicative information and assumptions used here are summarised and also may change without notice to you, particularly if based on past performance. Michael Gable and Novus Capital Limited believes that any information or advice (including any securities recommendation) contained in this website is accurate when issued but does not warrant its accuracy or reliability. Michael Gable and Novus Capital Limited are not obliged to update you if the information or its advice changes. Michael Gable and Novus Capital Limited and each of their respective officers, agents and employees exclude to the full extent permitted by law, all liability of any kind, in negligence, contract, under fiduciary duties or otherwise, for any loss or damage, whether direct, indirect, consequential or otherwise, whether foreseeable or not, to the extent arising from or in connection with this website.

Click to view our Glossary of Financial Terms