There is nothing particularly exciting about the Australian stock market these days. The malaise which has essentially paralysed the government seems to have spread to the business sector which in turn is slowly sucking the lifeblood out of the share market. It’s unlikely that things will improve soon and so investors should prepare themselves for the market to move lower over the next few months.
On a global level there is nothing much to help drag the Australian stock market upwards. The Chinese economy is slowing, the U.S. economic recovery is feeble at best, Europe is a mess & Japan is dealing with a range of challenges including rebuilding after last years disaster & the strong yen.
Yesterday the ASX All Ords & ASX 200 both fell by over 2% which was a correction waiting to happen since the market had been creeping upwards for no good reason for some months.
Normally I don’t focus too much on short term market movements but today I think it is worthwhile having a look at the 3 month charts for the S&P/ASX 200 because I believe they may be showing us the point at which the market is about to start a slide back towards 4000.
S&P/ASX 200 Index 3 month chart
The Australian stock market had been creeping unconvincingly upwards over the last three months but after yesterdays fall the market is almost back to where it was at the start of March 2012 as the chart above shows.
Investors appear to leap on any good news as a reason to buy and then sell when they realise that actually there isn’t much good news out there.
S&P/ASX 200 Index 3 month candlestick chart
The candlestick chart for the ASX 200 for the last three months is interesting because it shows that yesterday the movement was always downwards. In other words the market didn’t open higher and then fall or rally at the end of the day…investors just gave up and sold.
The first chart indicates that the simple moving average (SMA) has now reversed and I don’t expect it will turn positive this week. The second chart suggests to me that there is not a lot of interest in investing in the Australian stock market at the moment.
Putting these thoughts together leads me to conclude that the Australian stock market is likely to head lower over the next few weeks or months. I don’t know by how much but I am guessing when I look at the charts in 3 months time the S&P/ASX 200 will be lower than it is now. (unless there is a change of government)
S&P/ASX 200 Index 2 year chart
So where could the market go? Well the logical bottom for the market would be around the 4000 level and as I have written before I believe that is where we will end up before the next bull market takes hold.
As the chart of the S&P/ASX 200 (XJO) above shows we are much closer to the 2 year bottom than we are to the two year top and I can’t see any reason why the markets would be climb towards 5000 just yet. Why? Because the mining stocks are still falling & whilst the mining stocks are falling, the Australian stock market is not going to rally.
BHP Billiton, Rio Tinto, Global Mining Investments 1 year chart
The chart above shows the stock price movement for BHP Billiton, Rio Tinto and the listed investment company (LIC) Global Mining Investments.
I am using these three stocks as a form of commodities index since they are not just exposed to mining or exploration issues in Australia since they have global exposure to the commodities markets.
Clearly they all have been trending downwards over the last year and I don’t see any indication that this trend is about to be reversed and with the Chinese economy slowing it seems likely iron ore & copper prices for example have further to fall.
So that is the reasoning & logic behind my assessment that the Australian stock market is poised to head lower. Of course it’s just a forecast but I hope the charts will help investors make up their own minds.
Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital. He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp