The Australian 200 index is shouting a message. Investors who heed the market’s call will likely outperform those who don’t. But how do professional investors hear what a market is telling them? They study the charts.

The rationale for studying price action dates back to Aristotle. He is credited with the first acknowledgment of the “wisdom of crowds”. Statistician Francis Galton (Darwin’s cousin) performed a famous experiment in 1906, demonstrating that in a county fair competition the average of 800 guesses at the weight of a dressed steer was closer to the mark than the winning entry. James Surowiecki published on the topic in 2005, and scholars at MIT and Princeton (among many others) are currently working on refining crowd based analysis techniques.

Investors don’t need an economics lab to distil the wisdom of crowds. At any given time, a share price reflects the collective wisdom of all participants in that stock’s trading. Essentially, charts track the distilled wisdom of the crowd. Professional traders and investors benefit from studying the changes in market (crowd) thinking over time. And the local market is speaking right now.

This weekly chart shows the Australia 200 index is sending a clear technical signal. The slice straight through resistance at 6,000 is a sign of underlying strength. On balance this market action indicates a test of the post GFC highs around 6,150.

Adding confidence is the Moving Average Convergence Divergence (MACD) indicator at the bottom of the chart. When the MACD is near highs or lows it represent overbought or oversold conditions. Right now it’s close to zero, suggesting neither is present. The MACD also gives signals when the black line crosses the red. The black line is coming from below the red and is crossing upwards, generating a buy signal. The fact this is occurring on a longer term chart points to a longer term upswing.

Commodity strength, a lower Australian dollar and relatively cheaper valuations could all contribute to the positive momentum. Whatever the drivers, the higher levels of the Australia 200 index could in itself force more cautious investors back into the market as underperformance (due to defensive positioning) becomes a more prominent risk.

Traders and investors should respond in ways that reflect their own circumstances as well as the change in the market. No one can say with certainty whether the index will break through 6,150 to make new post-GFC highs. However a move through that level would in big picture terms introduce the possibility of a test of the all-time highs around 6,852.

Even at its much reduced level the financial sector plays an important part in the Australia 200’s performance. The sector comprises around 34% of the value of the index. That is substantially down on the peak composition of about 47%, reflecting the sell down in the sector from the 2015 peak. Mathematically, all the financial sector has to do for the index to make new post-GFC highs is sit still. Given a positive outlook for industrial commodities, any further recovery in financials (up 1.9% yesterday) may see those marks hit well before most investors currently expect.