Attacking co-dependency

THE Greek goddess Artemis was born before her twin brother Apollo. Despite being twins, they developed a fractious relationship.

Australia and China have a twinned relationship; the Australian economy is heavily dependent upon the health of the Chinese economy and China's sustained demand for raw materials. Recently Australia's relationship with China turned fractious and this has affected investment opportunities.

Much to the chagrin of Australia's Reserve bank, and Singapore tourists contemplating a Chinese New Year holiday break, the Australian dollar is challenging the long-term resistance level near US$0.805.

It has developed a very strong breakout above the upper edge of a long-term trading band and has the potential to test US$0.835.

The Aussie strength is a direct consequence of the strength of the Chinese economy and the weakness in the US dollar.

The long trading band is the most significant feature on the AUD chart. The upper edge of the trading band near US$0.775 was established in April 2016.

The breakout above US$0.775 is significant because it is the second strong rally move in six months. Just as in the July 2017 breakout, the current breakout has moved rapidly to the next resistance feature.

The resistance level is now experiencing its third test in six months and this increases the probability that the Aussie can break above resistance. A breakout above this level has significant impact on Australian interest rates, with the Australian Reserve bank reluctant to increase interest rates when the dollar is strong. The low interest rate setting adds further fuel to the housing market and magnifies the impact of any market crash.

The width of the trading band is projected upwards to set a target near US$0.835. This target is treated with caution and used as a guide only because these price projection methods are not quite as reliable as index and equity charts.

We use the Guppy Multiple Moving Averages (GMMA) indicator analysis to identify trend strength and trend changes. In these situations, it is a powerful analysis tool. Full trend confirmation has developed with the short term GMMA moving completely above the upper edge of the trading band. This is the key indicator and we use the ANTSSYS trade and analysis method to identify the opportunities as the rally continues.

China's economic strength is reflected in the Shanghai Index's strong rally. The key breakout is the move above the value of the long-term uptrend line.

The breakout has an initial target near 3650. The uptrend line started in May 2017 and acted as a support feature until November that year, when the index moved below the trend line. The trend line was tested five times as a support feature, so it has a confirmed and powerful influence on the market. The new breakout above the value of this line means it will now act as a support feature.

Traders expected the market to use the trend line as a resistance and consolidation level, but this did not develop. The rapid breakout above this level demonstrates the exceptional bullishness in the market.

A pullback is inevitable, but there is a high probability that the value of the trend line will act as a support feature and provide a buying opportunity. The Shanghai index uptrend reversal started in January 2018. The trend reversal anticipated the release of economic growth figures. The rally has delivered good returns for traders, but the speed of the breakout rally brings its own risk.

These fast rallies do not continue at breakneck speed for many months. A pullback is inevitable and the nature of that pullback helps to define the nature of the longer term uptrend.

The Shanghai Index has three support features: The first support feature is the value of the long-term uptrend line. The second is the historical support near 3440. The third is the value of the long-term group of averages in the GMMA indicator.

This is like an airbag. Wide separation in the long term GMMA means that investor buying absorbs the impact of an index retreat and provides a base for a rally rebound.

Traders watch for this pullback consolidation to develop. The future pattern of retreat and rebound rally will set the first anchor point for a new and stable uptrend line.

Chinese market strength should be bullish for the Australian market, and for the Australian dollar. In recent months, it appears that Australia is doing its best to discourage Chinese investment with specific taxes and fees, a broader attack on so-called China soft power and partnering with others in an attempt to hobble China's Belt and Road initiatives.

This creates cracks in the co-dependent relationship that has underpinned Australia's economic growth and heightens a sovereign risk element for investment in Australian equities. Investors in Australian equities will carefully watch the Australia-China relationship.