Australia 200 – Oversold

CMC Markets

Fear is back! Market wobbles emanating in Europe have knocked shares, commodities and risk currencies significantly lower. The question for traders and investors is whether falling markets have reached a price that reflects the risk of a disruptive event in Europe. On balance, the short term indications are that markets are oversold – especially the Australia 200 index.

Over the 12 trading days this month, the Australia 200 fell by more than 9% - taking the index from the top of the 9 month trading range to the bottom. The market touched a low last Friday, and has stabilised on the first two days of this week, turning at the support level just above 4,030. The chart tells the story:

Australia 200 - Daily

There is a clear trading range here, and while the index remains between (approximately) 4,000 and 4,400 will be viewed as a sideways market. This brings “mean reverting” indicators into play. Note the RSI at the bottom of the chart. The oversold indication is at its lowest since the August 2011 sell off.

The index at current levels has a Price/Earnings ratio of 13x forward earnings, and a dividend yield of 5%. From an investment point of view, these are attractive numbers.

At the New York close this morning futures markets indicated a loss of 19 points for the index at the opening. If the market does open lower, I’ll be looking for an entry point to buy the Australia 200 on a 3 day to 3 week view. There may be a couple of hundred points in this trade. My ideal trade:

BUY Australia 200 between 4,040 and 4,050, stop loss at 4,025.

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