Originally published by Crush The Market
The top 200 largest stock index in Australia (XJO200) has run into long term resistance in May as it failed to breach the 5925 level. After hitting the resistance level late April and early May the S&P/ASX 200 index has fallen around 200 points from the recent high of 5925.
Since forming a double top and confirming the reversal lower in May, the XJO index of the top 200 largest stocks is set to continue to fall further as it takes a breather from the recent strong run over the last 12 months. The road ahead for the index isnt clear as a number of major headwinds are approaching making further gains difficult.
Monthly Chart Review
Can The XJO Breakout Of The 5925 Resistance Level?
From a number of technical indicators the XJO index is likely to pause from its recent strong rally higher as it runs into some exhaustion within its uptrend.
Since the the XJO index is in a uptrend that has been running for a number of years as shown in the chart below, its likely that the index will head lower towards its long term uptrend around the 5525 which is its first level of support. If the index continues on its reversal lower towards support it could be several months before we see the chance for the index to make another run higher towards 5925.
XJO Headwinds - Potential For A Break Of Long Term Uptrend
The momentum indicators are supporting a move lower over the next few months leading into earnings season in Australia. In addition the slow stochastic is approaching its peak upper level on the monthly chart and about to cross lower. If the slow stochastic crosses over like it did back in March 2015 (See chart below), we would most likely see considerable correction in the XJO index over a 12+month period resulting in a break of if its long term uptrend. If this was to occur the only thing that could potentially reverse the move lower would be consecutive drops in interest rates by the RBA and or Government stimulus.
Australia's Macro Headwinds Could End The Long Term Uptrend
The other headwind facing Aussie stocks for the remainder of the year and 2018, comes from the macro picture in Australia, as the slowdown of the real estate market has begun with prices starting to fall in Sydney and Melbourne in May (See article below). The property boom up until recently has been driving the economy and a large part of the GDP growth. However this appears to be over as a number of interest rates from the banks, has finally stopped the strong real estate growth in prices. Together with construction boom spending now falling as the banks continue to tighten lending standards likely to slow the economy as well.
Below is a few recent articles outlining the headwinds stocks, real estate and the economy are facing over the coming months.
Click image for article source: afr.com.au - Subscription required
Weekly Chart Review
The weekly chart of the XJO shows a similar story to the monthly chart, with the index making a double top as well as the momentum indicators falling as the buying spree reaches exhaustion within the XJO index.
The only difference with the momentum indicators is that momentum has turned negative sitting at -62.2 and the slow stochastic has turned several weeks ago and looks to continue to move lower of the next few weeks.
On the weekly chart I would look out for a pull back in prices, potentially to the target area drawn on the chart around support of 5570. The key to watch is if the XJO index breaks down further closing below the blue uptrend line on the weekly chart.
If the weekly uptrend (blue line within target area) is broken all bets are off as we could see a move down all the way to around 5000 over the next few months.
Add in the earnings season which starts in late July, there is potential for a lot more volatility over the next 3 months.
