Tug of war between nervous traders and investors

10.16 AEDT, Monday 11 February 2013

Tug of war between nervous traders and investors rotating out of cash continues
By Ric Spooner (Chief Market Analyst, CMC Markets)

The stock market rally in recent months has created substantial gains that short term traders are becoming increasingly nervous about protecting. With the S&P/ASX index having gained 15% in an almost uninterrupted rally since November, short term traders are positioned to sell and lock in gains on the first signs of the market breaking below support levels.

Despite some nervousness about the political situation in Europe, index support levels have so far remained intact. In a tug of war between nervous traders looking to protect profits and investors rotating funds out of cash and into equities, the weight of new money continues to win out. China’s strong export performance in January continued the run of relatively good economic news from our largest trading partner setting the tone for a strong end to trading last week and a likely firm start this week.

With China closing down for New Year’s celebrations this week and a relatively light economic calendar from other major economies, the domestic reporting season will be the main focus for markets. While analysts appear to have been relatively conservative factoring expectations of subdued sales growth into their forecasts, the sharp selloff in Cochlear last week indicates that highly valued stocks missing estimates will not necessarily be protected by improved investor sentiment.

Trader caution about the possibility of a market correction is being heightened by the fact that the ASX 200 index is now at a technical resistance zone between about 4975 and 5020. This consists of the upper border of a trend channel that has been intact since November as well as the April 2011 and April 2010 peaks. Near term support is provided by the lower border of the channel that currently intersects at around 4910 and below that, last week’s low at 4870. A breach of these levels could be a warning sign of a deeper correction to follow.

http://www.cmcmarkets.com/

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