Australia 200 and US 30 Monday Comment

Australia 200 and US 30 Monday Comment

I've posted some thoughts on the outlook for the week and a review of both these charts including a potential break out set up in the US 30.

It's fair to say, I think that markets have now substantially removed the risk premium built into valuations to cover the possibility of a near term collapse in Europe.  Two signs of this are Italian long term bond yields that have returned to more comfortable levels around the 5% mark and US share Price Earnings multiples that have recovered to levels close to their post GFC average.

This is not to say that medium term risk premiums have been removed. Investors maintain significant concerns over longer term risks in Europe and elsewhere. The spread between say Italian and German bond yields is of course well above pre GFC levels and PE valuations are a long way below the levels enjoyed in 2007.

However, assuming the wheels don't fall off in Greece too soon and following the end of the Australian reporting season, share market focus is likely to return to economic growth prospects.

Investors will have a lot of economic statistics to assess this week but the employment data for Australia and the US are two that reflect the current state of play. Both are at the moment indicating a picture of moderate but far from exciting economic growth.

In Australia there was a sharp jump in job growth last month whilst in the US there has been significant improvement over the past 3 months. At this stage, however, the trend growth in job creation falls well short of the levels required for a sustained improvement in the unemployment rate in either country.

In both cases (Australia on Thursday and Non Farm Payrolls on Friday), markets will be looking  for the recent improved levels to be maintained. This will at least enhance job security for those currently employed and be a positive for consumer confidence providing a solid base for the moderate growth expectations currently built into equity valuations.

The strength of the Australian dollar remains a major headwind for the local share market. It may tend to pull in the opposite direction of the job market and is one reason for our market's relative underperformance. Decent employment growth is likely to be a key factor in any RBA decision to hold rates steady. This in turn would keep the Australian Dollar strong.

Australia 200 Daily Chart

The S&P/ASX 200 index has now moved broadly sideways since 27 January. Stocks going ex dividend this week will continue to be a negative factor for the index making it just that bit harder to break conclusively clear of the 200 period moving average (green line) which currently interests at around 4276.

A decisive break above not only the moving average but also the horizontal resistance around 4320 would be required to turn the outlook more bullish. If this happens an assault on the major trend line resistance around 4520/4550 looks a possibility.

If we get an international "risk off" move in the near future, the initial support is around 4165/42oo where the upward sloping pink trend line is likely to intersect with the last major low.

US 30 Chart

Whilst the Australian chart is flirting with resistance, this chart is currently testing the well established trend line support of the channel that has been in place since late December.

This channel has the look of a 3rd swing extension. If and when we do break below the channel support, a corrective move back towards the last peak at "1" looks a possibility.

The really significant support zone looks to centre around the 200 period moving average and the pink horizontal support zone in the 11950/12000 zone.

Interesting to see that we have also now established a rectangular or sideways trading range bounded by the yellow lines shown on the chart.  Swing traders may typically use this a break out opportunity and trade in the direction of a break out of this range. Of the 2 alternatives, a break to the down side may be present the best risk: reward alternative given how far we are above current supports.

If there is a break, I'll post some thoughts on profit objectives and stop loss management using the hourly chart to give more definition to potential stop loss levels inside the range to improve the reward: risk profile