As I write this blog, the index is testing trend line support, with a bearish double top formation potentially in play.

Economic statistics may be the driving force this week as investors hunker down to the task of assessing the extent of the damage (if any) flowing from the Italian elections and US budget cuts.

Daily Chart

Australia 200 CFD - Daily. Source: CMC Tracker Australia 200 CFD - Daily. Source: CMC Tracker

Eyeballing what's happened since November, it still looks unwise to assume that this up trend has ended while price is above the channel support and 20 day moving average. Even if there is a break of support, it may pay to be cautious and apply a filter  e.g. waiting for a close under the 20 day average before assuming we are headed lower.

That said, a break below these levels in the near future puts a double top into play.

A double top is not completed unless price breaks below the support at 4974. To be cautious it's worth noting that other patterns like triangles and rectangles often start life looking like a simple double top but morph into something else after extended sideways drift.

Even so, the double top possibility certainly bears watching this week. A decent red candle or 2 could see the trend channel and moving average supports broken.

If this happens there would be a failure swing on the RSI (a break below RSI support following lower peaks that diverge with price). If last week's high is not exceeded, it will also look like a partial pull back that failed below the channel resistance. Both these things would indicate mounting downward momentum and the potential for a decent correction of the whole rally since November.

Valuation theme

S&P/ASX 1 Yr Forward PE. Source: Bloomberg S&P/ASX 1 Yr Forward PE. Source: Bloomberg

I've been commenting on forward price: earnings valuations each week because I think this can be a real help in putting the current rally into historical context and assessing the scope for future moves in either direction.

Like price, PE values have formed a neat trend channel and backed off the resistance line last week.

At a forward PE of 15.35, there is now scope for a sizeable move in either direction.

A 10% rally would lift PE's to around 17. This is getting towards the upper end of pre GFC values but by no means out of the question given the much lower interest rates now on offer.

A drop of 5 -7% would still leave us above average PE valuations over the last 7 years. This would be consistent with a bit of a fright or change in sentiment but still well short of real doom and gloom territory.

The Week Ahead

Italian politics now seem likely to be a source of uncertainty for some time to come and the US budget situation may not change until the 2014 budget in May.

With these situations a likely given, markets will now wait for statistics to start showing what sort of impact they are having on confidence, economic activity and company revenues.

Commodity prices have the potential to play a role as "canary in the mine shaft" for the wider market sentiment this week. Oil and copper prices are weakening. WTI is at its 200 day moving average and copper is breaking below triangle support. Further declines in these markets, would be a negative for sentiment in the Australia 200.

Crude Oil - West Texas Cash CFD - Daily Crude Oil - West Texas Cash CFD - Daily

This is a heavy week for economic statistics both in Australia and overseas so I'll confine my comments to Friday's US non farm payroll figure. I think this can be used as a bit of a summary for how the market might assess figures generally over the next couple of months.

The consensus expectation is for jobs growth of 165,000 for February. This would be very close to the trend average over the past 6 months.

In one sense, this result would be quite positive. It would indicate that business confidence is holding up quite well after recent US tax increases and spending cuts. Even so, this sort of result is at best consistent with sub trend economic growth of around 2% and an unemployment rate that remains stubbornly high.  It would take more than a single month of better than expected figures to change this outlook.

On the other hand a really weak figure could easily scare the market now. It could be taken to indicate weak business conditions with worse to come and be the sort of event that might push indices below support levels after a long rally that leaves plenty of short term profit to protect.

Finally, I don't think tomorrow's RBA meeting is likely to have a market impact. The RBA is not expected to move rates. It would take a clear shift in the Governor's statement to a more definite easing bias to change consensus expectations that the RBA is currently in wait and see mode.