Originally published by AxiTrader
Australian stocks have rallied sharply over recent months with the ASX 200 index hitting a 20 month high of 5827 on January 9. That level briefly took prices above trendline resistance which stretches all the way back to the record high made all the way back in 2007.
But since then the market has pulled back with the ASX200 index closing at 5699 yesterday. This morning the SPI 200 futures are pointing to a further 14 point pullback.
Why the ASX is more than 2% off its recent peak when the S&P 500 is less than 1% from its own record high remains an open question.
Perhaps it's fears that a Big Bank Basket which included the Commonwealth Bank Of Australia. (AX:CBA) above $84 a share when last year's low was $69.50 might just be a little stretched. Perhaps its the continued worry that the commodity recovery from this time last year and the excellent cost cutting job done by Australia's miners means all the good news is in.
Or perhaps it's just a recognition that Australia is not the USA and will not get the full benefits of Trumponomics. Rather just the tailwinds of a strong US, Chinese and global economy.
That makes the ASX the derivative, not the main game.
That is something that has remained evident over the past year or so as the ASX has consistently oscillated around the overall performance of the S&P 500. Of course this is a directional relationship. But you can see periods of over and under performance as our local market, and traders in it, have found reasons to knock the ASX lower.
Are we in one of those periods now as tensions between Australia's biggest trading partner - China - and our number one defence ally - the USA - rise under Donald Trump? Certainly the Trump presidency could pose some uncomfortable questions for Australian policy makers and investors if he continues to take aim at China.
Just last night Chinese President Xi in Davos gave a veiled warning to president-elect Trump that his nation is ion favour of continued open markets but won't back down in the face of US aggression either.
In a very iron fist in a velvet glove comment Xi simply said no one will win a trade war.
Mutually assured economic destruction perhaps?
Anyway, getting back to the ASX the question on traders minds will be how far the ASX is going to fall before real support re-emerges.
The easy answer is when the US market turns higher again sentiment in Australia will lift. That could be once the inauguration of Trump as the 45th president occurs. Or it may take longer as traders wait for rhetoric to become action.
In the mean time though Australian investors will be looking for a roadmap and for that I turn to the SPI 200.
In may ways I prefer the SPI to the ASX as an indicator of true price action in the market. That's because the ASX 200 as a physical market - you know what I mean, it's all on screens after all - only trades a limited number of hours a day. The SPI on the other hand captures the excitement, fear, joy, and loathing of almost the full 24 hour clock of global trade.
So even though it's a derivative of the ASX the SPI is my preferred measure.
To that end it is clear the rejection of the downtrend line going back to the highs has been an important one on the weekly charts.
That's beacuse it wasn't just a rejection of a 9 year trendline but also the high marked the top of the current uptrend the SPI 200 has been in.
My own system suggests a target of 5482 on the weekly charts. While 5498 is the 61.8% retracement of the Trump selloff low to January high.
So this zone seems like a reasonable level for the market to test and perhaps find the reemergence of support.
In particular as I write often, a 38.2% retracement - which would see a move to 5498 - is just a simple garden variety fibonacci retracement that we see repeated in many markets and timeframes often and for as long as markets have existed.
Have a great day's trade