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Daryl Guppy is founder and Director of Guppytraders.com. He is a full-time active private position trader, trading equities and associated derivatives markets. He is an appointed foundation member of the Australian Government Shareholders and Investors Advisory Council.
He is also the author of several best-selling books including Trend Trading, SnapShot Trading, Trading Tactics, Bear Trading, Chart Trading, Trading Asian Shares and Market Trading Tactics.

He is the developer of the Guppy Multiple Moving Average Indicator included in EzyChart. He delivers accredited courses for the Singapore Stock Exchange. He also runs public trading workshops, and equity and futures brokerage sponsored seminars, throughout Australia and Asia.

GMMA BREAKOUT BEHAVIOUR

     

Despite the S&P ASX 200's retreat from 4420 this has developed into a strong trend break. Traders now look for a rebound from the lower edge of the long-term Guppy Multiple Moving Average (GMMA) and this is under test again. This is a classic GMMA breakout behaviour. The sustainability of the trend is yet to be tested so traders continue to manage using short term rally trading methods. This has the potential to become a major trend change and lead into a strong Christmas rally. However volatility remains high and this poses problems for risk and stop loss management.

Another move above 4300 is very bullish. The next resistance level is 4450. This is also the width of the consolidation band projection.

S&P ASX 200 with GMMA indicator

    This is the first genuine bullish activity for months. The activity has all the conditions of a precursor to a significant trend change. These are:
  • A close above the long-term downtrend line.
  • The short-term GMMA moves into the long-term GMMA and begins to move above the upper edge of the long-term GMMA.
  • The long-term GMMA turns upwards and shows strong evidence of compression.

    This is typical of the early stages of a trend change. The trend change continues development with these features:
  • A retreat follows the initial breakout above the downtrend line.
  • The downtrend line acts as a support level and the index slides down this until it encounters horizontally defined support. This is around 4060 on the XJO. This may include a sudden dip towards this level followed by a rapid rebound.
  • A strong breakout rally is limited by resistance. On the XJO resistance is near 4300.
  • A retreat from the resistance level will test the upper area of the long-term GMMA as a support level.
  • The short term GMMA will fully move above the long-term GMMA prior to the retreat and rebound.
  • The retreat and rebound behaviour prove a safer entry point into the developing trend because the uptrend strength is confirmed by this behaviour.

S&P ASX 200 with GMMA

Traders change trading tactics in this environment. The focus remains on identifying short-term, trend breakout's but there is a greater probability of these developing into sustainable uptrends. These initial rallies can be traded with derivatives to maximize returns prior to the retreat and rebound behaviour.

Market volatility is the key to understanding this market behaviour. It's an issue discussed in my book Guppy Trading. The tactics for these market conditions are shown in our DVD Catching the bounce. We have to learn to live with volatility.

First Published: 15 November 2011 - Copyright © Daryl Guppy

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