In early February, we wrote about how the ASX 200 corrected from a high of 6120 to 5782 and how we felt the subsequent rally was, in fact, a bull trap. Even though I pointed out the high of the range was 5940 (which was too low), the market has now closed exactly on the low of the range at 5820.
As I pointed out, with such a large correction, markets don’t just snap back and make new highs. It is foolish to mistake a correction for a pullback. The trade war rhetoric that Trump is now throwing around and inevitable reactions from other countries are causing quite a lot of market volatility.
A very interesting point to make as well is that this pattern and time it has taken to form almost completely mirrors the correction in the US markets in August 2015. We are currently at early October point, where the market formed a double bottom.
What May Happen Next With The ASX200
At this point, we will have to see what the market does on the open in the morning on Monday. There are a number of factors to watch out for to get an idea of which way the market may head.
If the market consolidates sideways and there are no more surprises to the downside, we could indeed see investor confidence return and for the market to form a double bottom. We should then see the market rally back to 6,000 over the next couple of weeks. The large bearish bar that formed could signify the end of a trend as the last of the sellers get out, tipping the supply and demand imbalance back towards demand. This could create a strong snapback which is bullish.
The most important point is to watch the news over the weekend. If any more trade war news comes out by Monday, this can seriously destabilise the markets and we could see 5650 or so, which is the next support level.
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How To Play The ASX200
The main theme going into the next few weeks is to be cautiously optimistic. It will be prudent to wait for the market to consolidate a bit before buying in or to split your buys up into multiple lots and average in. However, we have been presented with a great opportunity to make some great returns here.
Most of the blue-chip high yield stocks such as Commonwealth Bank (ASX CBA), National Australia Bank (ASX NAB), Australia & New Zealand Banking Corp (ASX ANZ), Westpac (ASX WBC), Wesfarmers (ASX WES), Telstra (ASX TLS) are paying huge dividends at these price levels right now. If you haven’t loaded up some of these high yield blue chips or are looking for an entry point – this would be a good opportunity. If you aren’t sure how to build your portfolio so that it can generate a good income with good capital preservation, talk to our Private Wealth arm for a free consultation.
For another more advanced way to cut the cake, you can sell put options to scared investors for very high premiums right now. VIX closed at about 15.5%, which is about 25% higher than in the past two weeks or so. Whenever there is uncertainty in the markets, volatility goes up and so do insurance (put option) premiums. Here is an example CBA Put Option trade that closed for over 50% profit in about 2 weeks. Our Private Wealth Advisers also specialise in trade ideas such as this.
If you aren’t sure what to do or how to take advantage of this market volatility, have a look at some of Quant driven model portfolios which generated 18.65% this year.
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This is general advice only. MF & Co Asset Management has not considered your personal financial needs, objectives or current situation. This information is not an offer, solicitation, or a recommendation for any financial product unless expressly stated. You should seek professional investment advice before making any investment decision.