Did you know that we're approaching a significant test for the Australian sharemarket?
When you view the sharemarket from a technical perspective, there are significant levels that are like tests.
If the market passes certain tests, then there's a certain gateway that opens for the sharemarket to approach the next level.
And if the market fails the test, then it's a step back to the last level.
These tests are called support and resistance.
Facing the Australian sharemarket now is the test of 4800 points for the S&P ASX 200 index.
If the sharemarket passes this mark, it will be free to move up to the next level. That would be good news for investors because it would mean that, from a technical perspective, the sharemarket would be free to move higher.
On the other hand, if the market fails the test and bounces down off 4800 points, it will go back to the next level. This of course would be bad news for investors because it would mean losses.
This test is a short-term test and is likely to determine the market's direction over the next few months.
So where did this 4800 point level come from?
Below is a chart of the S&P ASX 200 from June 2008 to September 2009.
You'll notice that in July, August and September 2008, the test of 4800 points was a level that acted as support for the market.
Note: To obtain a larger size of the chart, please email support@belldirect.com.au
Think of 'support' acting like a floor to the share price. It's a price point that the share price continually seems to bounce off and have a difficult time moving below. The more times that a share price bounces off this floor, the weaker it usually becomes. Once the share price is able to break through the floor, it is considered significant because the share price is then free to move downwards until it reaches the next floor.
Often support and resistance switch roles. That is, old support levels become new resistance levels.
So that 4800 point level that was support back in 2008 is now resistance in 2009.
Resistance levels act like a ceiling to the share price. It's a line that the share price seems to have difficulty moving past. Once the resistance level is broken, the share price is free to move upwards until it meets new resistance levels.
Support and resistance levels can help us understand where share prices may be moving next. They are physiological levels in the share price.
So the next crucial test for the Australian sharemarket is at 4800. If we see a strong move above that point, that would be a positive. If we see a strong move back below that point, that would be a negative.
Technical analysis or charting is not an exact science and is not correct 100% of the time.
But as you can see, it can help you to time your trades to help you get more from your investments. It's just another tool that can help both traders and investors alike.
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Happy investing!
Julia Lee Equities Analyst Bell Direct
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