ASX 200 Follows Through to the Upside

The benchmark S&P/ASX Australian 200 Index followed through on Tuesday’s gain, advancing another 0.45% in Wednesday’s session with a close at 5,435.4. Consumer discretionary stocks led the Index higher.

The Index has now recouped Monday’s loss and is essentially unchanged for the week. The Index has responded positively in the wake of the release of the minutes of the Reserve Bank of Australia’s policy meeting last month and the first speech from Governor Philip Lowe. The minutes noted that Q3 inflation is important for the November rate call, while Governor Lowe stated, in part, that the economy is adjusting well, there is an end in sight for the mining slump.

The Index also maintained an upside bias in the wake of the latest economic data out of China, as there was no surprise in the numbers, with China’s third quarter GDP growth coming in on target at 6.7%. Industrial production slowed to 6.1% year-over-year from 6.3%, while retail sales grew at a stable yet solid pace of 10.7% year-over-year.

The ASX gained 5.3% on a closing basis as a result of the move off the September bottom and became heavily overbought. While the Index initially consolidated in reaction to the overextended condition, sellers finally came to the forefront last week and, with Monday’s downside follow through, which pushed the index down 0.83%, the Stochastic, a price momentum indicator, dropped to an extreme oversold level. The swift rally upon becoming oversold is a constructive sign, as is the ability to hold the 38.2% retracement of the advance from the September low. Thus, a retest of the rally high at 5,498 is expected over the short term. On a move above this level, the next higher resistance is at the August 23rd high at 5,574, followed by the early August peak at 5,611.

On the downside, support is at the recent low at 5,386, which represents a test of the September 27th low and corresponds to a 38.2% of the advance from the September low. Continuing to hold this level would keep the index well-positioned to resume the move higher over the near term. On a resumption of selling that leads to a break below this support, the next support is at the 50% retracement at 5,344, followed by the 61.8% retracement at 5,308. At present, the 38.2% retracement is expected to remain intact.

On the weekly chart, the decline to the September low confirmed a successful test of the lower boundary of the rising trend channel, which has defined price action throughout the majority of 2016. The rebound from this lower channel line is a bullish sign, suggesting a return to the upper channel line is now possible. However, price action in the weeks ahead will be monitored closely, as the establishment of topping signals prior to a test of the upper channel line would increase the probabilities of a breakdown from the channel.

Australian employment data will be released overnight. The unemployment rate is expected to come in at 5.7% for September, up from 5.6% in August. The NAB Quarterly Business Confidence Index will also be released at the same time as the employment data. There is no economic data scheduled for the remainder of the week.

ASX 200 Daily/Weekly Charts


Tracy L. Morganthall, CMT, has been a Technical Market Analyst for more than 20 years. She has experience analyzing and producing reports on equities, both domestic and international markets, as well as Forex and commodities. She attended Trenton State College in Trenton, New Jersey, earning a Bachelor's in Finance.