Hi everyone,

I’ve posted some commentary on this morning’s market outlook together with thoughts on the daily and hourly Australia 200 index charts.

The Australian market is expected to follow international markets with a positive opening in response to European leaders’ announcement of a fiscal compact for the 17 Eurozone nations.

Markets were encouraged to see the proposed international treaty requiring governments to submit draft budget plans to the European Commission for scrutiny and for fines to be imposed if structural deficit targets are exceeded. This provides a framework for medium term improvement in debt levels.

However, investors are likely to remain nervous about the risk of near term contagion of the European debt situation.  The proposal to bring forward the creation of the €500bn European Stability Mechanism and to fund the IMF with an additional €200bn may provide sufficient capacity to fund Italy and Spain through 2012 and in to 2013 if they are unable to access funds from the bond market at reasonable rates. However, this may not be enough to provide credit markets with confidence that a long term solution is possible without larger scale support from the ECB.

These concerns were reflected in the market yields for Italian and Spanish bonds which showed little response to Friday’s announcement. At 6.5%, Italian 10 year bond yields remain uncomfortably close to the sort of levels that could lead to another crisis of confidence for investment markets. After an initial gain equity markets may also struggle to get past near term resistance levels in the absence of further news to support an improving equity outlook.

Daily Chart

Price remains in a broad, overlapping and gently upward sloping trend channel. There is a fairly significant resistance around the 4435/4485 zone represented by the 200 period moving average (green line); top of the trend channel and the previous support zone (pink line)

At this  stage the European plans may not have been good enough to get us through this resistance. It may require more definite initiatives to remove contagion risk or an improved economic outlook to clear these levels

Hourly Chart

Interesting to see that the hourly chart has completed an ABC correction at a Fib cluster level. This was a 50% retracement of the swing up from O to X and projected that the swing down from B to C would be 161.8% of the move from X down to A.

The next hurdle for those who bought on completion of the ABC correction is the resistance represented by the pink line at around 4275.  Overlap through this level would set us up for an assault of the resistance levels at B and X and potentially for a move up to the 4435/85 resistance on the daily chart

Rejection of the pink resistance line would. on the other hand, be a sign of weakness, especially if we also break conclusivly back below the green 200 period moving average