AEX - Sell first then buy
The strong bullish price action last week surprised me a bit since I was expecting the bounce to be weaker than it was. On the other hand, I wouldn't go as far as saying that the correction is over just yet - even though it could come to an end this week or next.
Prerequisites: The AEX is like many other indices in a longer term up trend and has been constrained for the most part of this year within a consolidation, indicating higher prices in due time. The consolidation thus far has a triangular shape to it which means that we can expect prices to oscillate within this structure until prices break out to the upside or the downside. I favor a bullish breakout. The triangular structure is not only seen on the daily price chart but also in the RSI indicator which is important to keep track of at this point in time. Often the RSI break out of its formation ahead of price; so look at the RSI for clues for in which way the break out will occur.
Looking at support we can see that the 200-day moving average is almost perfectly aligned with the rising trend line of the triangular structure. I think that this indicates that support is strong and that the line of least resistance has an upward bias.
Resistance is in turn defined by the downward sloping line of the structure which is aligned with Thursday's high at about 355.50.
Chart: AEX Daily overview
If and when a break out of the formation occurs, medium-term targets are located at 362, 368 and 377 which are Fibonacci extensions derived from the bullish move from November into the January peak. The bull market high thus far is located at the 375 level set in 2010 and should be considered an important level.
In the very short term, prices have stalled and produced two consecutive indecision candles telling me we are in for at least a short-term pullback.
Chart: AEX Daily close up
Trading thoughts: There are actually three set ups here I think; one bearish and two bullish. Let's start out with the bearish one.
Sell AEX at market as momentum has stalled and take a short-term position with a target of 345 and a stop no higher than Thursday's high at 355.50. We had a very strong run last week and the immediate bullish potential is limited I think.
The first bullish idea is to buy the dip in front of the 61.8 percent retracement at 345 with a stop at 340 and a first target of 355.
The second bullish idea is to buy a bullish break out above 355.50 with an immediate target of 362. If a break out occurs and trade is triggered place the stop at 350 and move it higher as prices develop according to plan. Take profits at the 362 level or let the trade run towards 375; lock in profits along the way.
Chart: AEX overall Elliot Wave count
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