The market reaction to yesterday’s interest rate cut gives traders a big clue to the short term direction of the market. Lower rates are thought to support share prices, yet the share market FELL after the RBA decision. This suggests market positioning (rather than fundamental or technical factors) is the key driver at the moment, and the arrow is pointing down.

The big picture remains – recovery in the US, stable growth in China, Europe going backwards. This “two out three” global scenario, combined with undemanding valuations and strong dividend yields should see the Australia 200 Index higher in the medium term. These fundamentals helped drive the 237 point rally from the mid-November low at 4,310. The problem is that ten out twelve days saw rises – and markets rarely go anywhere in a straight line.

A correction is on the cards.  Yesterday’s weakness in the face of supportive moves from the RBA implies that the correction has begun. Investors with a longer timeframe may choose to simply “ride out” a correction.

So where is the market likely to go?

Australia 200 – Daily

20121205 xjo 2

Source: CMC Tracker

Interestingly, the Fibonacci retracement levels coincide well with support and resistance levels. The 38.2% retracement level at 4,454 sits just below the 4,460-70 support. The 50% retracement is at the 4,425 resistance (now support). This is the level which capped the market on the way up, and served as the “break out” point.

Given the multiple targets, traders may choose to split any potential trade in two:

SELL Australia 200 at current levels, stop loss above 4,525, target 4,458

AND

SELL Australia 200 at current levels, stop loss above 4,525, target 4,428