The International Monetary Fund (IMF) is predicting that losses from the global financial crisis is going to hit $5.7 billion.
That's $850 for every man, woman and child in the world!
It predicts that another $550 billion of writedowns are yet to come over the next two years from US financials. To date, we've seen $510 billion worth of writedowns so it looks like the worst is yet to come.
So the question is where to next for the Australian sharemarket?
The truth is that the sharemarket bottoms before the economy does.
In the 1990s the sharemarket bottomed a whole year before the economy had turned and in the 1980s it was 10 months before.
The message to remember is that the sharemarket is forward looking so it tends to price things in early.
To find out what's next, one of the key indicators I watch out for is unemployment. Generally when unemployment falls, the sharemarket improves.
Take a look at these periods where unemployment fell:
You can see why unemployment is one of my favourite indicators.
At the moment unemployment is rising, signalling that there could be more pain for the market.
There are also technical signals that can be used to predict where the sharemarket is heading.
Here are three reversal signals that frequently occur and can signal that a trend may be reversing...
A doji in candlestick charting occurs when buyers and sellers are in balance. This happens when the first price and the last price of the period is at the same level. It usually looks like a little 't' but can also look like a capital 'T'.
Take two weeks ago as an example. We saw two classic reversal signals.
On Wednesday we saw a doji, the little 't' which is highlighted above by the first circle.
And then two days later we saw a gravestone doji, which looks like an upside down capital 'T' and is highlighted by the second red circle.
These are classic reversal signals using candles.
Were they correct? Well we have seen the market last week reverse, after the gains in the previous seven weeks.
So be careful of candlesticks that look like a 'T'.
Previously I've talk about double tops. These are 'W' shapes at the bottom of the cycle or 'M' shares at the top of the cycle.
In the above example with Iluka Resources you can see the double top which looks like an 'M' circled in red. The double top happens after the stock had been moving up signalling a reversal. After the double top, Iluka lost around a third of its value.
In the graph below showing the S&P/ASX 200, the red line is the long-term moving average or the 100 day moving average.
When the red line moves below the black line, that's a signal that the long-term downtrend may have come to an end.
You can see that hasn't happened yet which is why the longer term trend is still bearish.
So I've just shown you there ways to tell whether a trend may be reversing:
Remember however that technicals are patterns which tend to reoccur but there's no guarantee that they are always right.
Happy trading!
Julia Lee Equities Analyst Bell Direct
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