Week ending 19-September

It certainly was an exciting week. The almost failures of Lehman brothers and AIG. The interbank rates going through the roof and the formation of a bailout fund. The weeks ranged over 350 points an finished just 70 points below last Fridays close.

Looking at the weekly charts this week is a hammer which is a rejection of the lows. Especially if next week ends up higher and does not intrude into this weeks range.

The Australian market has been trying to resist what is happening in the US, but unless the Australian market totally ignores Wall Street from overnight, I think the next stop is 4200.
Will 4200 be the bottom? It is an interesting question as we will probably hit it over the next week or so. The market always looks forward and the media is talking about the end of the world so the market is factoring in not just the failure of Lehman brothers and the AIG teetering on the brink but all of the other investment houses going belly up. So a case could be made that the bottom is nigh.

Support Broken

Last week the market kept within the same bands that it has kept within for the last 10 weeks. Yesterday, the market dipped but still kept above the 4710 aupport level. Well, with the failure of Lehrman Brothers, the US market dipped over 4% last night and the overnight futures that our market will at least open below the support. The close is the key number and if the ASX 100 close ends up above 4710, then I think that there could be some confidence that the floor will hold, otherwise the next support is around 4200 and I doubt that the market will slow much on it's way to 4200.
I have more confidence that 4200 will be the limit of the current move (the PE of the market is under 12 at the moment). However, I wouldn't laydown any capital until we see some recovery, and then only short term.

Australian Share Market Weekly Roundup

Here is a weekly chart of the ASX200. The last week has a definite down bias and we are still stuck in a small range and before any trading can resume we would need to see a break upwards or downwards. On the downward side, the next support would be around 4200. This represents the market giving back around 60% of the gains from March 2003 and the peak in October last year. This 60% figure tends to be the most that a bear market will claw back from the previous bull. For an interesting study on the history of the size and extents of bull and bear markets, I could not recommend the Trader Vic books enough. The author of these books studied the Dow Jones index for over 150 years and found some very definite patterns at the macro level when studying the index.

Other interpretations of the current pattern is to interpret it as a Bear Flag which puts extra emphasis on the next major move being down. Note that the range is contained within the 38% and 50% fib levels.

Interest Rates down by 0.25%

Well it has finally happened and the Reserve has started dropping interest rates. The banks have also come out and have said (rather guardedly) that they will also drop their rates. The problem for the banks is that international credit has a greater affect on their rates than what the Reserve is doing. I think that the fear of being bashed by the Treasurer is the main reason for the banks announcing that they are dropping rates.

Is it good news? Well for those that are being squeezed by interest payments will initial welcome it. However, you need to remember that Interest Rates never drop in a healthy economy and they never rise in a bad economy.