Originally published by AxiTrader
It's been a wild ride for Australian stocks over the past couple of weeks as the rally to 5950 in early May quickly gave way to weakness as traders reacted to the budget and financial stocks came under heavy selling pressure.
That saw the S&P/ASX 200 index trade down to a low of 5697.60 late last week while the SPI hit a low at 5,685. Falls of more than 4% for local stocks when they were at their lows.
But with support in the 5,680/5,700 holding in the physical market and with the rally in US stocks to end the week on a high SPI traders marked prices higher by 26 points on Friday night with a close on the4 SPI at 5752.
But the question for local traders is whether the market can climb even higher and take back some that lost ground relative to the performance of US stocks recently.
Naturally, a big part in the emergence of divergence of performance - in what has been a solid relationship for the past 21 months or so - has been the pressure the Big 5 Australian banks have been under. That's as a result of the market's negative reaction to the continued ratcheting up of regulatory and political pressure on them which has culminated in the liability tax and subsequent heavy selling that resulted.
So there is likely also a handbrake of the resurgence in local prices back to recent highs - and where the ASX/S&P 500 relationship might suggest they should rally to unless or until the bearish washes out of the financials.
Closer to hand though there is a clear level on the charts above which if the SPI can rally that would signal the period of bearishness may be over for the moment.
That level, 5771.5, is the bottom of a sideways range the SPI was trading in across April and May before last week's big fall.
If prices can climb back in here it's a sign things are settling down and the emerging bearishness dissipating. But if prices fail at the above level it's a sign that 5,655 and perhaps the February low of 5,526 for the SPI is in the frame.
Have a great day's trading.