Great Gains but is This The Comeback? Expect high volatility

Submitted by Marco on 18 June, 2006 - 10:09

I probably overreacted over the bounce labelling it a dead cat bounce. Actually you can never tell a dead cat bounce until some time after the event. until the All Ordinaries (XAO) dips and breaks the long term uptrend I will be able to call this recent recovery a dead cat bounce. (The definition of a dead cat bounce is a temporary recovery after a bear market decline - after this slight recovery, the market continues to fall.) This isn't to say that I'm either bearish or bullish trading the markets at the moment. Volatile markets present many profitable opportunities for a trader given that they have a plan and execute the plan correctly. Expect the markets to be volatile in the coming weeks if not months, reflecting the psychology of the market which will react to daily news stories as they come. This volatility is mainly due to the uncertainty in global interest rates. The markets have made great falls and gains of the past week, is this the beginning of a bounce back from recent lows?

The market saw its biggest fall since September 11, 2002 on Tuesday. But on Friday, panic selling seemed to have been overcome by a surge of buyers, sending the market higher by 2.7 per cent - the biggest one day gain in more than three years. The All Ordinaries rose 96.7 points to 4932.2 but only 5.4 points for the week while the ASX 200 increased by 9.3 points to 4969 on Friday, or just over 2 per cent. For the week the index was up 3 points over the four trading days.

On Wednesday it looked like this: The All Ordinaries was 11.7 per cent from top to bottom, while resources was 19.5 percent, and banks 10.2 per cent. Meanwhile BHP bounced after a 23 per cent "correction" and Zinifex 40 per cent.

BHP Billiton had its biggest one-day rise in almost four years, soaring 5.5 per cent, or $1.43, to $27.43, and up 2.6 per cent over the week. Rio Tinto jumped almost 5 per cent, or $3.53, to $76.90 on Friday, up more than 4 per cent over the week.

The long term uptrend is still intact, still holding the uptrend channel. Any sharp moves from the American markets, notably the Dow is likely to be followed by the Australian stock market. Any bounce back will find resistance around 4950 and further resistance at 5080. Check your charts!