Stock markets are becoming vulnerable to a correction after the consistent rally of recent weeks. Against this background, disappointing US earnings announcements on Friday and a lack of specific progress at the Euro leaders’ conference proved the catalyst for a sell off.
As we head into a new week, the question before traders is whether Fridays' move is the start of something larger.
In this post I've outlined some brief thoughts on coming news events and review key support levels for the Australia 200 and SPX 500 charts
The coming week
The banking sector has run hard recently as investors chase yield. This week sees a couple of key news events for the bull market in banks.
The first is ANZ's profit announcement due on Thursday. The bank rally has been underpinned by the assumption of steady, low growth earnings. However, NAB’s cash earnings pre announcement on Friday caused some nervousness on this score. Cash earnings were only flat compared to last year. This was below consensus and may continue to be a negative influence leading into ANZ’s result on Thursday. Investors will be looking for more detail and clarity on recent bank performance.
The outlook for further rate cuts has also underpinned the rally in bank stocks. Wednesday’s CPI release will be closely watched in this regard. Investors will be looking for an inflation rate which gives the RBA unambiguous scope to further reduce interest rates if economic growth remains soft and the dollar stays high. With the introduction of the carbon tax causing some distortion to the CPI in the September quarter, analysts will be focussing on the trimmed and weighted mean measures. As long as these stay at or below the low 2% range, the RBA is not likely to see inflation as a barrier to further rate cuts in the near term.
The US Dollar strengthened on Friday night when the Euro Leaders' Summit failed to produce an announcement on Spain. This filtered through into a selloff in commodities. Australian index traders will be watching this trend closely over the next few days. Further Eurodollar and commodity weakness would be a clear short term negative for our market.
The rally since June looks to be in the 5th swing of a 5 swing advance. The move up from "4" in late September also has a 5 swing structure. If this interpretation is correct, we are vulnerable to a decent correction from here on.
At this stage, continuation of Friday's decline and a move below the first dashed support line at 4514 would look like a sign of weakness. This would represent overlap through the peak at "3" improving the possibility that we are going to correct the rally off the September low at black "4".
Using similar logic a move below the black "3" at 4412 would signal a corretion of the whole move since June. The likely minimum pullback for this move would be a 38.2% retracement taking us back to around 4350
The US stock market leads world share market sentiment and can often be a useful guide in these circumstances.
The SPX 500 chart is currently in a channel formation. It's not hard to imagine that a break below support here would see the Australia 200 overlap below 4514. A bounce off channel support though could be bullish. That would create the possibility of a move back to and an eventual break through channel resistance. That could signal continuation of the major uptrend.