Buy the rumour, sell the fact

09.51 AEDT, Monday 25 March 2013

Buy the rumour, sell the fact
By Ric Spooner (Chief Market Analyst, CMC Markets)

News on the Cyprus debt negotiations is likely to be the defining event for today’s trading. Markets have positioned for the likelihood that agreement will be reached on a bank restructuring package.

The relatively muted market reaction to last week’s delay on a funding decision and a firm finish to markets on Friday night indicate a market view that this morning’s news will most likely be positive. Markets are betting that funding will be provided for Cyprus and that this situation will not be allowed to escalate into one that creates a crisis for the Eurozone in the near term.

Last week’s relatively relaxed reaction sets up for a situation where market reaction to good news on Cyprus may be limited, possibly even attracting some profit taking by short term traders in a classic buy the rumour, sell the fact situation. It also suggests the greater risk for today’s trading will be to the downside if this issue is not put to bed with a confidence building restructure of Cypriot banks.

From a technical perspective, the S&P/ASX 200 index has now clearly ended the uptrend that began last November. The index is now in a corrective downtrend. So far the index has retraced 28% of the rally from the low in mid-November to the peak in early March. Corrections like this are more likely to end up retracing 38-62% of the rally. That implies potential for the index to decline to somewhere between 4850 and 4650 before the major uptrend resumes.

On that basis, short term index traders may be looking for opportunities to sell rallies from current levels. The index is currently holding the support of its 50 day moving average around 4650. A rally off this support, could provide selling opportunities if it reaches the 5050/5100 zone.

Web: http://www.cmcmarkets.com/

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