Support and resistance levels, together with patterns and trends, are the foundation stones of technical analysis. Oscillators and indicators are the mechanisms by which the analyst investigates the probability of a trend continuing in its current direction. Different aspects of chart analysis apply at different phases of the market. Currently the support and resistance levels are determining the next moves in global equity markets.
The point at which a price or index breaks downwards out of a clearly defined pattern or support level is called the breakout point. It is a common effect for the price, having broken downwards, to rally back upwards to retest the breakout point. This is usually an extremely dangerous level. If the price fails to penetrate above the breakout point then a major trend reversal takes place with the ensuing bear market taking out the previous lows.
Unfortunately the recent rally in the leading global equity indexes has merely risen back up to test the breakout points from classic support levels that occurred earlier this year. They all look ready to reinstate the major bear trend in global equities.
Compare this data to the gold charts in my previous posting "Gold stocks to outperform US equities" of May 15th and there is no argument about where one's money should be.
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| UK FT 100 back up to test the 6000 breakout point. | German DAX back up to test 6400 breakout after bouncing off major support at 5500. | |
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| Hang Seng back up to test breakout point from top pattern. | Japan Nikkei back up to test major resistance line. | |
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| Singapore back up to test major breakout level. | Toronto back up to test neckline of major head and shoulders top pattern. |
Every chart has pulled back up to test the original breakout point at which the major down move started. This is a particularly dangerous area. It is a SELLING area. NOT the start of a new bull market run.
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| S&P 500 has pulled back to test the original 1300 breakout point. | NASDAQ has pulled back to test the major Resistance level at 2500 from which it fell to 1650. | |
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| DJIA has overshot the resistance level and is testing the tops of the previous patterns. | Dow Transport is nowhere near its previous highs but has established a major support level at 2300 |
Compare all these global indexes. Note that every one, except the DJIA, is pulling back underneath their major resistance levels. This is a most dangerous situation.
Dr Clive Roffey
Johannesburg
26 May 2001Editor's Note: Dr. Clive Roffey is South Africa's leading Technical Analyst, whose forte is gold mining stocks.