The ASX 200 index has enjoyed a remarkable rally, climbing approximately 13% from its lows in April. However, as the benchmark encounters several crucial resistance levels and momentum indicators begin to shift, the risk of a potential pullback is rising.
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ASX 200 Overview
The ASX 200 cash index extended its upward momentum for a third consecutive session on Monday. Despite the gains, the session ended with the formation of a small “shooting star” candlestick a classic sign of potential trend exhaustion.
Adding to the cautionary signals, the index attempted to break above key technical levels specifically, the March peak, December’s low, and the symbolic 8,000 mark but the move lacked conviction, resulting in a false breakout. Meanwhile, the daily RSI (2) has been signaling an overbought condition since last Wednesday, underlining the market’s stretched state.
While market breadth was positive 10 of the 11 sectors posted gains, driven largely by energy and information technology, and advancing stocks outnumbered decliners by 139 to 46 bulls appeared reluctant to sustain the rally at these elevated levels.
Futures tied to the ASX 200 (SPI 200) edged up by 17 points during overnight trading. However, a two-candle bearish reversal pattern known as a “Dark Cloud Cover” formed on Monday, hinting at a potential shift in sentiment.
ASX 200 Futures (SPI 200) – Technical Perspective
The ASX 200 futures have staged a near 13% recovery since April’s low, but now face solid resistance at the 200-day exponential moving average (EMA). Alongside this, a bearish two-candle pattern (Dark Cloud Cover) has emerged around the previous highs from March and the lows from December.
An important observation: while the recent rally has been accompanied by declining trading volumes, Monday’s decline saw a noticeable uptick in volume, signaling that bearish pressure could be gaining traction. This divergence between volume and price action often hints at a turning point.
Additionally, the daily RSI (2) has retreated from extreme overbought levels. Historically, it took several days between the RSI peaking and the ASX 200 undergoing a reversal, suggesting that the market could be setting up for a delayed but significant move.
A drop below the weekly Volume Point of Control (VPOC) at 7980 could open the door for a deeper retracement toward the 20-day EMA around 7887, or possibly to the psychological 7900 mark, which also aligns with the high-volume node at 7783.
Traders will be closely watching for signs of a potential swing low forming, which could develop into the ‘right shoulder’ of a larger inverted head and shoulders bottom pattern a formation that typically hints at a longer-term bullish reversal if confirmed.
