This could be one big sucker's rally, warns analyst

A technical analyst is warning investors to brace for another round of heavy losses that could send the sharemarket tumbling below the five year low struck in March.
 
‘‘There’s too much good news creeping in and sentiment is becoming too bullish for this to last,’’ says David Hunt, president of the Australian Professional Technical Analysts Association and a strategist with Adest, a market training organisation.
 
‘‘This could be one big sucker’s rally.’’
 
Hunt, who called the top of the market in 2007 and the low in March this year within a week of each turn, expects the S&P/ASX 200 index to peak in early September, but this could then be followed by a catastrophic fall, possibly to new lows.
 
‘‘I thought that first we might get a couple of weeks of weakness about now before a final run at a top around 4200,’’ he says. ‘‘However, that weakness doesn’t look likely as we hit 4200 last week. We could now go as high as 4500 before hitting major problems. The last leg of the bear market is yet to come. That could well take the index down to around 2900.’’
 
The S&P/ASX 200 fell to a five-year low of 3145.5 in March.
 
Hunt, who combines fundamentals and sentiment indicators with market structure, says the index’s rally to a level above his original forecast adds to his concerns.
 
‘‘This extra strength is more worrying because it will translate to more weakness when the market does turn down – a great sucking noise is sounding,’’ he says.
 
Hunt adds that when calculating targets and time-frames, it is important to remain flexible and adjust to the market’s moves.
 
Forecasts made with monthly charts need to be fine-tuned with daily charts.
 
For example, when BHP Billiton was on its highs at $38 in June, Hunt forecast the resource giant could get down to $26. BHP did fall as he predicted, but at $31.38, Hunt swallowed his pride and told his financial planning clients to buy BHP aggressively as his analysis indicated a strong bounce was likely.
 
‘‘It is important to take into account what the market is doing,’’ he says. ‘‘You have to step back and look at what’s probable.’’
 
David Coe – Australian Financial Review
 
Tues, 4th August 2009