Lessons learnt from ASX plunge

AT THIS STAGE THE EXPERIMENT HAS BEEN COSTLY BOTH FINANCIALLY AND EMOTIONALLY.

UNTIL last Friday the market behaved as expected after the divergences discussed last week.

I have mentioned in the past that divergences are a strong indicator of a change of trend, but there is no way I know to measure the likely extent of the move following the divergence.

In last week’s case the move lasted only two days.

There was also no divergence on Friday to indicate the falls on Monday and Tuesday.

I suffered the largest one and two-day falls ever.

This may well be the price I pay for abandoning my tried and tested stop system.

At this stage the experiment has been costly both financially and emotionally.

I have looked back at what the situation would have been had I continued to use stops as usual.

Most stocks held would have been sold some time back and right now I would be holding the profit and waiting to buy again.

Nearly all of them have now moved down to support levels that are either trend lines or previous price spikes.

With this in mind I will continue to hold for a few more days to see if these support levels hold.

Remember this column is written on Wednesday, so if any stocks break support, it should be evident by today, so you may see some sold in next week’s column.

More than half the gains of the past few months were wiped out in the past week and I don’t want to see all those gains lost.

I will revert to my long-held stop system for any new trades and contemplate the price paid for the lesson.

This is a classic case of “when you win, you celebrate and when you lose, you contemplate and you learn more when you contemplate”.

I have certainly done some contemplating this week.

On Wednesday, the All Ords, ASX 200 and the SPI futures all found support at the trend line drawn from 2015-16. It now remains to be seen if the uptrend resumes from this level.

If not, then we will likely see falls on the All Ords to around 5700–5800, where the next strong support level lies.

The banks are mixed, with ANZ right on support and the other three already breaking support and likely to have further falls.

Westpac (WBC) has broken support and should find some support around $28. The next support for the Commonwealth (CBA) is $74 and if the National (NAB) continues down, its next support is between $24 and $25.

Telstra continues to trend down as it has since its early 2015 high of around $6.70. Its next support is around $3.

If the market is going to resume the uptrend, we will likely see some new market leaders.