A couple weeks ago I looked at a few charts of the S&P/ASX 200 Index and outlined my view that if the financial stocks lost momentum, then this would in turn drag down the ASX 200. Well here we are a few weeks later and the financials are no longer able to offset the drag the mining stocks continue to have on the market with the ASX 200 now struggling to hold above 5300. I suspect this will be the case for the next week or so and perhaps for the rest of the year as well.
Despite some bizarre reporting on a number of finance websites there is little to be optimistic about regarding the global economy. A clear sign that all is not well was the recent cut in interest rates by the People’s Bank of China (PBOC) – since central banks don’t tend to cut rates when economies are in a period of robust growth. There are also rumblings about the European Central Bank (ECB) considering trying their hand at some form of QE (Quantitative Easing) which again signals economic weakness, not strength.
In Japan the economy is struggling to shake off the consumption tax hike and some periods of severe weather, while growth in the U.S. has been largely fuelled by the Federal Reserve Bank’s massive programme of QE which is coming to an end. (well for now at least)
A quick glance at commodities prices also suggests there are few reasons to be bullish about global economic growth. (despite assurances from G20 leaders recently)
So now is probably a good time to look at trading ranges for the S&P/ASX 200 Index as I did for the ASX All Ordinaries Index in ASX All Ordinaries Index: Charts, Analysis & Trading Ranges in December 2013.
First however let’s have a quick look at what ASX 200 has done during the last month.
S&P/ASX 200 Index (XJO) 1 month chart
On Monday the market received a boost from the PBOC’s interest rate decision when for reasons that cannot be explained, investors took this as cue to be optimistic. However the overall recent trend is downwards and I can’t see anything to reverse this for any length of time, although there will be “reactions” to the actions of central banks from time to time.
Therefore if the current downwards trend is maintained for a week or so then the ASX 200 will once again test 5200. Just 6 months ago many would not have thought this was likely.
S&P/ASX 200 Index 6 month chart
Around the middle of this year it appeared almost certain to many market analysts that the ASX 200 would hit 6000. Despite clear signs that commodities prices had come off the boil, the new bullish line was that the increased volumes would make up for price falls. However many mining companies are now in cost reduction mode, although the weaker Australian dollar will provide some buffer for ASX listed mining stocks for a while.
The 6 month chart of the ASX 200 doesn’t look too encouraging to me and I doubt we will see the market anywhere near 6000 at the end of 2014, although the Reserve Bank of Australia (RBA) and other central banks may do their best to give the markets some Christmas Cheer!
Regarding the performance of the ASX 200 for 2014 thus far, this can be summed up in one word – dismal – and the chart below supports the use of that word.
S&P/ASX 200 Index 1 year chart
Despite the usual excitable headlines in the mainstream news and finance media, the Australian stock market so far this year and done very little to get excited about. Yes there was a sharp burst upwards past 5600 which came to a crashing end, but apart from that the market has not really done much.
On the 1 year chart of the ASX 200 above I have drawn a line at the 5300 level which shows that as of today, the Australian stock market is basically where it was at the start of the year. So although some news headlines at times convey the impression that the stock market is enjoying heady days, the facts clearly don’t support that view.
However having some trading ranges (or boundaries) in place may help long term investors (or even shorter term traders) make the best of an otherwise seemingly dull market. So although a year has almost past since I last looked at ASX trading ranges, my view is those I set out back in December 2013 (and actually before that) still remain valid.
S&P/ASX 200 Index 3 year chart with trading ranges
On the chart above I have drawn lines at 5200 and 4600. In simple terms I consider the market over-bought above 5200 and over-sold below 4600.
When the market is in the 4600-5200 zone I am looking for under-valued stocks but I may look to take profits if a particular stock has had a good run. When the market is above 5200 I am more inclined to be a seller and when below 4600, more inclined to be a buyer.
Of course if the ASX 200 had kept rising to 6000 earlier this year then I would have had to review my trading ranges. But at this stage I think we are likely to see the ASX 200 test 5200 again so for now, I don’t see any reason make changes to these ranges.
This article was written by Greg Atkinson who is the Managing Director of Ohori Capital. Greg is from originally from Sydney but now works and resides in Japan. He can be followed on twitter via GregAtkinson_jp