What the price charts say about equities in the US, Australia, London and China.

ASX Investor Update asked Violeta Todorova, a leading technical analyst with Morgans, for her view on what the charts are saying about global equities.

Dow Jones Industrial Average

The Dow has been trading in a primary uptrend over the past 10 years, which is still technically intact. The market advanced from a low of 6,469 in March 2009 to a high of 29,373 in January 2020, an increase of 354 per cent in just over a decade.

With ongoing trade war talks and Brexit, volatility increased significantly in January 2018. The strong uptrend took a breather and the index has been trading within the boundaries of a broadening wedge pattern over the past two years. The pattern shows a lot of uncertainty, reflecting the geopolitical risks that dominated headlines throughout 2018 and 2019.

Although the direction of the breakout for the broadening wedge is random, we note that the price action has spent more time within the upper end of the pattern. Applying distribution analysis to the broadening wedge, we conclude that the market remains strong and the index could extend its march further.

This has become a buy high, sell higher, market with the strength related to a US-China trade deal that seems to be coming together.

From 2018’s quantitative tightening and 2019’s quantitative and fiscal easing, the market has rebounded to a record high and is currently trading above the upper trendline of the wedge.

The weekly momentum indicators are overbought, suggesting a pullback to unwind the overbought momentum conditions could be seen in early 2020.

Taking a longer-term view, being so late in the cycle the clear loss of momentum over the past two years and the overbought and diverging monthly momentum conditions (seen in the small 30-year monthly chart in the upper left corner, warrant caution.

Either the cycle turns or rolls on until the US election. Given the environment of greater political uncertainty, we think it is prudent to focus on capital preservation and take advantage of opportunities as they present themselves.

With the synchronised wave of dovish central bank policy, the strong employment market and the US Federal Reserve expanding its monetary base, our view is that throughout 2020 the market will continue to trade sideways within the boundaries of its current broadening wedge, rather than rolling over.

Volatility is likely to remain elevated and a deep correction to at least the middle of the consolidation pattern crossing at 24,800 is likely in the year ahead. 

Source: IRESS

S&P/ASX 200

The Australian index has been trading within the boundaries of an uptrend channel over the past 10 years, which is technically intact.

The index advanced from a low of 3,120 in March 2009 to a record high of 7,144 in January 2020, slightly exceeding its November 2007 peak of 6,851. The market advanced 129 per cent from trough to peak and has considerably underperformed the major developed-market indices.

The Reserve Bank of Australia rate cuts appear to have supported the equity market for now, but low wage growth and weak spending patterns continue to weigh on sentiment.

The index is approaching its channel line crossing at 7,100, which is likely to act as a resistance. A bearish divergence between the price and the Relative Strength Index (RSI) has formed on the 10-year weekly chart, suggesting near-term upside from here is likely to be moderate.

A pullback to unwind the weekly overbought momentum conditions would be considered healthy and could be seen in early 2020. A key level to watch is support of 6,671, which if broken would signal an extension of the correction to 6,350, where strong buying interest is likely to occur.

The RBA’s rate cuts and repeated mentions of quantitative easing show it is preparing to defend against an economic recession. If it pulls out the big guns, this will probably support the equity market as investors look for returns to beat deposit rates and as newly created money is flushed into the economy.

Generally, news about any stimulus drives share prices higher and typically the gains occur six months in advance of cuts to the cash rate or any other stimulus program.

With the market rallying more than 20 per cent in 2019 and valuations becoming increasingly stretched, we hold the view that returns are likely to be more subdued in 2020.

Our baseline scenario is that the market is likely to fluctuate between 6,350 and 7,200 – which suggests downside risks to current levels.

Source: IRESS

FTSE 100

In London, the FTSE 100 has been trading in a primary uptrend since March 2009, fluctuating within the boundaries of an uptrend channel.

The index advanced from a low of 3,460 to a high of 7,903 in May 2018, rising 128 per cent in nine years. Brexit uncertainty and a volatile British pound stalled the rally as economic policy uncertainty depressed business investment and business confidence.

For most of 2019, the FTSE 100 traded between 7,004 and 7,727 and is currently sitting closer to the top of its range. The elephant in the room with that suppressed trading activity is the Brexit deadline of 31 January, 2020.

The FTSE 100 underperformed the major global sharemarkets over the past two years and if we eliminate the Brexit concerns and assume a return to a stable environment, we see potential for a “Brexit bounce” in early 2020.

The potential upside target is 7,900. Throughout 2020 the index is likely to fluctuate between 6,750 and 7,900, and with monthly momentum conditions close to overbought territory, we see upside risk from current levels as moderate. 

Source: IRESS

Shanghai Composite Index

In China, the Shanghai Composite Index has been trading sideways over the past three years, fluctuating between 2,440 and 3,587. With globalisation, major equity market cycles tend to coincide, with major market tops and bottoms occurring at almost the same time.

However, Chinese equities have been navigating their own uncertainties and showing a completely different cycle compared to the rest of the main equity indices, and significantly underperformed their peers in recent years.

Trade and policy actions were two defining factors for Chinese equities in 2019. The index rebounded strongly at the beginning of the year thanks to expectations on stimulus and a trade negotiation resolution, but started declining in April as hopes faded.

As we enter 2020 those factors are still here and could stay for a while. Recently, resistance of 3,048 has been broken, which suggests the index could extend to 3,280.

The weekly momentum indicators are in neutral territory and the index remains trapped in its trading range. We believe Chinese equities will continue to trade sideways throughout 2020, with a good buying opportunity arising on a pullback towards 2,700 to 2,800.

Source: IRESS