Market reactions to the Peoples' Bank of China's (PBoC) rate cut on Friday night are perplexing. The initial response was positive, pushing shares and industrial commodities higher. However, yesterday saw resources in particular under pressure, and a reversal of the previous session's gains. What's a trader to do?
From a fundamental perspective, the rate cut from the PBoC may be viewed as a game changer. Globally, markets are concerned about decelerating growth in Europe and Japan. On the other hand, the USA is clearly in recovery, with last night's GDP reading confirming accelerating growth in the third quarter. This makes China the "swing factor" in the global growth scenario. Clear and decisive action from the PBoC is a signal of intent to keep growth in China from dropping out of bed - avoiding a so-called "hard landing".
This is likely to be positive for the Australia 200 index:
The index turned at the 61.8% retracement of the previous rally, fitting the premise that the sell-off was a corrective move. Confirmation could come from a move over the 38.2% level - just above the current market at 5388. A move through this level could see a test of 5560, and ultimately the post GFC highs around 5680, while offering a tight stop loss level: